Michael Casey - Chairman & Chief Executive Officer Richard Westenberger - Chief Financial Officer & Executive Vice President Brian Lynch - President

Taposh Bari - Goldman Sachs & Co. Ike Boruchow - Wells Fargo Securities LLC Anna Andreeva - Oppenheimer & Co., Inc. Robert Ohmes - Bank of America Merrill Lynch Susan Anderson - FBR Capital Markets & Co. Steve Morato - TL King and Associates. Steph Wissink - Piper Jaffray & Co Kate McShane - Citi Research

Good day, everyone. And welcome to Carter's First Quarter 2016 Earnings Conference Call. On the call today are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Brian Lynch, President; and Sean McHugh, Vice President and Treasurer. After today's prepared remarks, we will take questions as time allows. Carter's issued its first quarter 2016 earnings press release earlier this morning. A copy of the release and presentation materials for today's call have been posted on the Investor Relations section of the company's website at www.carters.com. Before we begin, let me remind you that statements made on this conference call and in the company's presentation materials about the company's outlook, plans and future performance are forward-looking statements. Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent Annual Report filed with the Securities and Exchange Commission and the presentation materials posted on the company's website. On this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, today's call is being recorded. And now, I would like to turn the call over to Mr. Casey.

Thanks very much. Good morning, everyone. Thank you for joining us on the call. Before you walk you through the presentation on our website, I'd like to share some thoughts on our business with you. We are off to a good start this year. Earlier today we reported a record level of sales, earning and cash flow for our first quarter. We had good sales growth in all channels of distribution, wholesale, retail and international. Despite the highly promotional retail market we improved price realization and our profit margins. Our supply chain performance was exceptionally good in the first quarter in terms of on time deliveries and distribution efficiencies. And we meaningfully increased the return on capital to our shareholders. Given our first quarter performance together with our latest forecasts, we believe we are on track to have another good year of growth in sales and earnings. And we are raising our earning guidance for the year. As we shared with you on our last call, we saw a good demand for our brands through the holidays last year which continued into the first quarter in through most of March. Our year-to-date comp sales were up about 5% through the third week of March. With the Easter shift we did not see the holiday related demand we expected in the last two weeks of the quarter. Historically, an early Easter is good for our business if it is accompanied by warmer spring like weather. And as many of you know winter weather return too many parts of the country in the latter part of March and into early April. Thankfully with warmer weather arriving in more parts of the country, sales trends are improving and we are expecting positive retail comps for the second quarter. The stronger dollar continues to way on our results. It affects us in a few ways. It increases the cost of products sold in Canada which we purchase from Asia in US dollars and then sell in Canadian dollars. It affects the translation of our Canadian results and we believe it impact the level of demand from international tourists shopping with us in the United States. On a comparable sales basis, domestic demand in our retail business grew about 4% in first quarter but it was largely offset by lower international demand. We saw the biggest impact from lower international traffic in the Southeast and some of our largest most productive outlet stores in Florida. These are some of our best performing outlets that have historically benefited from significant international tourism. Historically we see good cross border shopping for the Easter holiday but we saw less of that this year. As we shared with you on February, we expect to see less pressure on our results in the second half when exchange rates are expected to be more comparable year-over-year. To achieve our growth objective this year, we have initiatives focused on providing the best value and experience in young children's apparel, extending the reach of our brands and improving our profitability. Within the next few weeks we expect to execute a global refresh of one of the most important component of our Carter's product offering. We will refresh, rebrand and launch our new born to 24 months collections to be known as little baby basics. These are the essential must have products that our Carter's brand has long been known for. And represents about 10% of our consolidated annual sales. This is our high margin, replenishment business that has meaningful presence in many of the major retailers in the United States, in our stores, online and increasingly in many parts of the world including our new e-commerce business in China. This product launch will be supported by refreshed point-of-sale marketing in thousands of store locations in the United States and international markets. It'll also be supported by increased investments in digital marketing, social media, radio and direct marketing. I encourage you to visit our national retail partners, our stores, our website to see the strength of our new product offerings. We've also strengthened our brand experience by responding to our customers' requests for extended sizes. The design of many of our sleepwear and playwear products appeals to an older child. We continue to see strong demand for our Carter's size 8 launched last fall and we will be introducing size 14 for our OshKosh B’gosh brand this year in preparation for our back to school marketing events. We believe we can improve the value and experience of our brands with our new loyalty program called Rewarding Moments launched last October. To date nearly 7 million customers have enrolled in this across channel across brand rewards program. Customer engagement in this initiative has exceeded our expectations. We are seeing higher redemption rates and higher spending upon redemption. We are also seeing higher sales per customer and higher purchase frequency. We plan to extend the reach of our brands in the United States this year by opening about 60 Carter's stores and 50 OshKosh stores most of which will be in our side-by-side store format. The best traffic to our stores in the first quarter was to our side-by-side stores. We believe consumers enjoy the experience and convenience of having our brands together. We began this year with about 100 side-by-side stores and expect to open it an additional 250 co-brand stores by 2020. Under the current model on a combined basis, the side-by-side stores generated about $2 million in annual sales and 20% for our margin. We expect this initiative will provide good source of growth for us in the years to come. We continue to strengthen the experience of shopping for our brands online. We are seeing good traffic to our website increasingly through mobile devices. Mobile phone demand grew over 70% in the first quarter. We believe we benefit from our unique market position having both a co-branded store and co-branded e-commerce distribution strategy for two of the best known brands in young children's apparel. We are reaching more consumers internationally through our multi channel, multi brand distribution capabilities. We saw strong demand in international sales which grew 14% in the first quarter. Our business in Canada continues to strengthen its number one market share position in young children's apparel with sales up 20% in constant currency. A recent consumer survey ranked Carter's as one of the most trusted retailers of young children's apparel in Canada. We believe China represents a meaningful new market opportunity for us. The number of annual birth in China is 4x that of the United States. Our new e-commerce business in China is ramping up consistent with our plan. Since our launch last year Carter's has ranked among the top young children's apparel brands on Tmall that's Alibaba's consumer website. Earlier this year Carter's has recognized by Tmall as the best new baby apparel brand on its website. And just recently Carter's was recognized again by Tmall as the most fashionable brand in the mom and baby category. We expect this initiative will contribute over $20 million in sales this year and we believe China may contribute over $100 million in sales to our business by 2020. With respect to improving profitability we are focused on increasing our direct sourcing capabilities, improving distribution center efficiencies, strengthening inventory management capabilities and improving OshKosh profitability. We believe we are on track to source about 50% of our products directly to our Asia based teams by 2017. We are exploring the next phase of this initiative which may enable a higher mix of units sourced directly at better margins. Collectively our profit improvement initiatives should enable us to achieve a 14% operating margin by 2018. We are encouraged by the more macro trends which are expected to be good for our business. The number of bus in the United States is improving. The labor market is improving. And the trend in new home construction is also improving. Each of these macro trends should bode well for the young children's apparel market and may drive more traffic to our brands. In summary, we are off to a good start this year. We are seeing good demand for our brands in all channels of distribution. And we have good initiatives underway to achieve our growth objectives this year. I am thankful to all of our employees who are working around the clock here in North America and in Asia to strengthen our brands and our company's performance. Their good work is reflected in the results we are reporting this morning. Richard will now walk you through the presentation on our website.

Thank you, Mike. Good morning, everyone. My comments today will refer to our performance on an adjusted basis, reconciliation to our GAAP results are provided in the appendix on today's presentation and in our earnings release. I'll begin on Page 2 with some first quarter highlights. Overall, we had a very good first quarter. We saw good demand across our business with consolidated net sales growth of 6%. Adjusted operating income grew by 8% and adjusted operating margin expanded by 30 basis points to 13% driven by strong gross margin. Adjusted earnings per share grew 8% over last year to $1.05 which was above our previous expectations. Unfortunate this performance we attribute to favorable timing, including earlier than plan demand in our US wholesale business and lower spending. We expect to get back some portion of these benefits in the second quarter. So another Q1 results and our expected Q2 performance is a first half which we believe will be largely in line with our expectations coming into the year. We believe foreign currency issue continue to work against us including negative translation effects which reduce our net sales growth by about 70 basis points in the first quarter. And the ongoing effect of lower international consumer demand in our US retail store and e-commerce businesses. Moving to Page 3, with details of sales performance in the first quarter. Our Carter's and OshKosh businesses in the US each grew 5% with good growth in OshKosh retail segment at plus 12%. Revenues from new stores have continued to contribute strongly to our overall growth. Our international business was particularly strong in the first quarter; reported growth for this segment was approximately 14% with growth of 20% on a constant currency basis. I'll cover our business segment results in more detail in a moment. Turning to our first quarter P&L on Page 4. In addition to good top line demand consolidated gross margin improved by 140 basis points to 42.9%. This performance reflects a modest improvement in average inner pricing largely due to mix and lower product cost. Adjusted SG&A grew 9% in the first quarter, similar to recent quarters the increase in expense driven by growth in our retail store businesses in the US and Canada as well as ongoing growth in e-commerce primarily in the US but also in Canada and now in China. We've also been investing in marketing and technology. Additional detail on SG&A in the quarter can be found in the appendix of today's presentation. Reported royalty income was down about 5%, the decline is largely result of the comparison to last year which included auto recoveries from a couple of our licensees. Underlying domestic royalty income actually increased nicely in the quarter driven by strong performance across several product categories including shoes which has been an area of focus for us. Low operating income several items were somewhat unfavorable compared to last year's first quarter. The interest and other line reflect $3 million loss in the quarter related to unfavorable settlements and revaluation of foreign currency forward contracts. We use these contracts in hedging a portion of the FX risk related to the purchase that US dollar denominated inventory for the Canadian market. Our effective tax rate increased approximately 70 basis points to 35.2% in the quarter principally due to odd installments that benefited the effective tax rate in the first quarter of last year. Our weighted average share count declined approximately 2% versus last year reflecting our share repurchase activity. For the recap bottom line adjusted EPS for the first quarter was $1.05 representing growth of 8% over last year. Now turning to Page 5 with the few balance sheet and cash flow highlights. Our quarter end cash position was strong at $395 million. Quarter end inventory is increased 5% versus last year and we believe our inventory positioning quality were very good exceeding the first quarter. Operating cash flow for the quarter was strong at $128 million compared to $87 million last year. This quarter capital expenditures were $26 million compared to $21 million in last year's first quarter. Free cash flow in the first quarter improved to $103 million driven by strong operating cash flow. As Mike mentioned in his remarks we were active in returning capital to shareholders in the first quarter. We repurchased $72 million of our stock in the quarter and paid out $17 million in dividends. We continue to execute share repurchases into the second quarter completing an additional $54 million through yesterday as noted in today's press release. Our year-to-date share repurchases totaled $125 million reflecting good progress against the new $500 million authorization approved by our Board this past February. With respect to our capital structure we continue to evaluate ways to possibly further optimize our balance sheet and provide capacity for the return of capital to shareholders over time. We will keep you updated on our evaluation. Page 7 provides a summary of our business segment results in the first quarter. Consolidated adjusted operating income grew 8% over last year with adjusted operating margin up 30 basis points to 13%. Our Carter's US wholesale and international businesses achieved higher operating margin. While Carter's and OshKosh retail segment margins declined versus last year. Corporate expenses leveraged 40 basis points compared to last year. Moving to our individual business segments in more detail beginning with Carter's wholesale on Page 8. Net sales for Carter's wholesale for the first quarter grew 4% reflecting good product performance and the benefit of a new playwear initiative. As I said earlier, this growth was a bit higher than we had anticipated due to earlier than planned demand from several customers. Carter's wholesale segment operating profit grew by $8 million in the first quarter. This improvement reflects strong product demand, lower product costs, favorable distribution expenses and lower bad debt provision. Fall 2016 seasonal booking are planned up modestly versus last year and this outlook is consistent with what we shared with you on our last update. For the full year we continue to forecast low single digit net sales growth in Carter's wholesale. Turning to Pages 9 and 10. As Mike mentioned we are excited about having rebranded our core baby products as Carter's little baby basics. In the next few weeks we'll begin shipping these products to our wholesale customers as well as introducing them in our retail stores and online. In addition to the new little baby basics name we re-imagined the creative around this product collections to be more appealing and relevant to today's millennium moms. This couple of pages give you a glimpse that some of the new marketing collateral. You should try to see this new branding and creative across our business channels very soon. Turning to Page 11 and the Carter's retail segment. Total Carter's US retail segment sales increased 6% versus last year. Carter's retail segment same stores sales were comparable to last year with e-commerce comp sales growing 15% and store comps declining 4%. Our store comp declined in the first quarter reflects the continuation of a lower consumer traffic trend which we believe was driven in part by lower demand from international consumers shopping in the US. In addition, we experience weaker Easter holiday selling compared to last year. To provide some perspective on the effects of the decline in international consumer demand on our Carter's retail comp metric, and it has been only 13% of our stores represented a 100% of our comp decline for the first quarter. We've designated these 71 locations largely as tourists store which have historically had a high mix of international consumers. In the first quarter we opened 16 new stores. These stores continue to deliver good return with an average return on investment above 20%. Our Carter's quarter end store counted higher by 61 locations versus a year ago. Carter's retail segment profits were $41 million in the first quarter compared to $44 million in the first quarter of 2015. Segment operating margin declined by 210 basis points driven primarily by the stores portion of the business which reflects store expense de-leverage, higher promotional activity due to lower international consumer demand and increased marketing spend. The forecasting that retail segment operating margins will stabilize in the second half and in fact increase in the fourth quarter as we anniversary the lower at level of international consumer demand we experienced last year. On a full year basis we are forecasting Carter's retail segment margins in 2016 to be roughly comparable to 2015. On Page 12 we reprise some announces that we shared with you previously which summarizes the significant effect we believe the stronger US dollar and lower international traffic have had on our US store and e-commerce businesses in the first quarter. The left side of the page shows the year-over-year US dollar appreciation against the number of currencies that aligned with our historically significant international consumer base. Our analysis indicates that demand from international customers continues to be meaningfully lower year-over-year, down about 17% for our combined Carter's and OshKosh businesses on a comp basis. These international consumer sales declined were generally consistent with what we experienced in the fourth quarter. Domestic consumer demand was good in the first quarter with a 4% comp increase for our combined Carter's and OshKosh businesses. We believe we will continue to experience lower traffic in demand from international consumers at least through the first half of 2016. Page 13 to 15, our efforts on recent Carter's direct mail piece, these three pages feature current seasonal items such as baby 2-pieces set, boy's polo and shorts and boys and girl's swimwear. Turning to Page 16 and OshKosh's retail results. OshKosh growth continues to be strong with total retail segment net sales growth of 12%. OshKosh's retail comp increased nearly 3% comprised e-commerce comp growth of 20% and a store comp decline of 2%. Much like Carter's store the OshKosh store comp decline reflect lower consumer traffic which we believe is heavily affected by lower demand from international consumers and weaker Easter holiday demand. The OshKosh store comp decline was very concentrated within the portfolio. Only 5% of our stores or nine locations represented the entire comp decline in the first quarter. These particular stores are historically very high volume locations with the traditionally high proportionate international consumers. In the first quarter we opened 11 new stores and closed one. All of the new stores run our side-by-side format. As of quarter end we operated 43 more OshKosh stores than at the end of the first quarter last year. We ended the first quarter with 107 side-by-side format stores which now represent 43% of the OshKosh store portfolio. These new stores are delivering good returns with an average ROI above 15%. OshKosh retail segment income in the first quarter declined by $1 million to a loss of $2 million. Segment operating margin decline by 90 basis points which similar to Carter's is driven by the stores portion of the business and reflect store expense de-leverage and higher promotional activity due to lower international demand. Benefiting this segment's profitability were distribution efficiencies and lower product cost versus the year ago. On a full year basis we are forecasting OshKosh retail segment margin expansion compared to 2015 with a meaningful increase in the profit contribution from this segment of our business. Pages 17 and 18, our selections from a recent OshKosh direct mail piece featuring summer product offerings. These pages feature our boys and girls seasonal pants and shorts as well as girl skirts, all items which we think are must have products heading into the summer. Now turning to our international segment on Page 19. We saw very strong demand for our products outside of the United States in the first quarter as indicated by the 14% growth in net sales in this segment. Growth on a constant currency basis was even stronger plus 20%. Our Canadian store and e-commerce businesses have continued their very strong performance trends. Our stores in Canada delivered a comp sales increase of 13% and e-commerce in Canada grew 47%. Combined these represented a Canadian retail comp of 15%. We open two new stores in Canada in the first quarter bringing our store total in this market to 149. As of quarter end we are operating 22 more stores in Canada than at the end of the first quarter last year. We expect to open a total of approximately 20 stores in this market in 2016. Our international e-commerce business nearly doubled in the first quarter with net sales growing to $6 million compared to $3 million last year. Our new business in China drove most of this growth with Canada contributing as well. Net sales in the wholesale component of our international segment were $33 million, up from last year due to the addition of new international partners and growth with multi national retailers. International segment adjusted operating income in the first quarter grew by 21% to $8 million. Segment operating margin improved by 60 basis points to 10.8% driven by the strong comp sales and margin performance in Canada that offset unfavorable foreign exchange effects. Pages 20 and 21 include photos of one of our newest international stores. This suburban Toronto location represents our introduction to premium malls in Canada. The store opened earlier this month is off to a good start. Now turning to Page 22 for outlook for the second quarter and fiscal 2016. As we told you on our last call, we expect the majority of earnings growth for the year will come in the second half with the first half weigh down by the negative effects of foreign currency. Both the impact of translation of the Canadian business and the US dollars and the ongoing effect of lower international consumer traffic and sales in our US store and e-commerce businesses. We also had significant investment spending in the first half notably in marketing, technology and supply chain which we believe will support the longer-term growth we are planning across the business. For the second quarter we expect net sales to grow approximately 3% to 4% driven by growth in our US retailer and international businesses. We are forecasting second quarter adjusted diluted earnings per share to decline approximately 10% to 15% compared to an adjusted EPS of $0.73 in the second quarter of 2016. This earnings forecast contemplates first the net sales in the Carter's wholesale segment are expected to decline in the low single digit largely due to customer demand and accelerated shipments into the first quarter. Second, we are continuing the investment spending that I mentioned. Third, we have accelerated our opening of new OshKosh stores in 2016. These stores weigh somewhat on profitability near term as they ramp up and become more productive. And finally while the US dollar has weakened a bit recently, we believe the second quarter will continue to be pressured by the various foreign currency exchange effects across the business which we have described. Assuming achievement of our second quarter plans will achieve first half earnings which will be roughly comparable to 2015 and which will be consistent with our initial plan for the year. For full year fiscal 2016, we continue to expect net sales to grow approximately 6% to 7% driven by our US retail and international businesses. We are raising our 2016 full year adjusted earnings per share guidance to reflect the benefit of year-to-date share repurchase activity. We are now forecasting full year adjusted earnings per share to grow in the range of 10% to 12%; up from our previous range of 8% to 10% compared to 2015 adjusted $4.61 per share. Several risks that we continue to actively monitor include inconsistent trends and consumer demand and store traffic, the level of promotional activity in the marketplace, foreign exchange rates and consumer sentiment in light of the political and macroeconomic environment. With these remarks we are ready to take your questions.

[Operator Instructions] And for our first question we go to Taposh Bari with Goldman Sachs.

Good morning. Nice start for the year guys. Mike I got on the call few minutes late.

You miss the best part.

Did you talk about April?

Yes. April is improving. Yes, we are actually seeing good performance year-to-date. Carter's right now total retail is up about 2%, OshKosh up little bit more than 1%. We had good performance through the year-to-date, through the third week of March. I think our comps, our retail comps are up about 5%. The last two weeks of the quarter were not what we had expected, typically get a nice lift during holy week that week before Easter. And we didn't see it. And then typically business drop throughout that Easter. And based on what I've heard from people we do business with, I think that's -- in a similar experience that -- typically if you have early Easter it is good for our business if you have nice weather. If you have more spring like weather. But if as you know lot of winter weather came back tail end of March into early April there was snow starting up in the Northeast it was cold here. It is cold here in Atlanta over Easter so what we gain through most of the first quarter we gave back in the last couple weeks. But with warmer weather more spring like weather arriving in many parts of the country, the consumers back out shopping and business is picking up. So we expect positive retail comps for the second quarter.

Good to hear. I wanted to ask another one on the store comp which has been negative for a while now. And I know that they are -- it sounds like there are discrete Issues but I was hoping you can give a little bit more color. I guess this specific question I am asking is you are opening a lot of stores, a lot of these side-by-side stores in call it domestic market or domestic addressable market not tourist locations I am assuming. And not outlet centers, can you talk to what the comp growth is looks like in some of these newer stores call it the one, two, three year old vintage stores. Are they comping positive?

They are. We are seeing good performance in the new stores. The issues we are having with the stores right now is international demand. With the stronger dollar we are seeing less international tourism. A relatively small number of stores are representing a 100% of the comp store decline largely in these large very successful outlet locations, Orlando, Miami, Sawgrass Mills, this one is down out in Las Vegas, these are good and some of our largest most successful outlet stores just in less international tourism. Domestic demand, domestic the comp from domestic demand in the first quarter was up about 4%. And it largely got offset by lower international traffic. So we believe our strategy is the right one to consider open these stores, bringing the brands closer to the consumer, improve the portfolio of stores such that the outlet stores which continue to be good for us. And have them very profitable stores but make those a smaller percentage of the total portfolio. We are seeing good returns on the new stores. We are seeing a very good response to the new side-by-side stores which the lion share of the store is going forward will be side-by-side stores. And the best traffic that we saw in the first quarter was to the side-by-side store. So we feel good about the strategy. If we for whatever reasons in the next several years we start to see fewer good centers to go into if we are not seeing the returns that we are seeing on the new store investment we'll reconsider the pace of store growth. But for now we are going to continue to open up, we open up about 60 Carter's stores here in the United States and about 50 OshKosh stores and all those OshKosh stores will be in the side-by-side format.

Great. Last one I know let somebody else I hop on Richard on the capital return evaluation process. Sounds like -- obviously you picked up the pace of buyback here in the first quarter but it sounds like the review is still ongoing. Did I hear that correctly? I am just trying to understand if the increased buyback pace in 1Q kind of satisfies the review or if there is still review conclusion that's pending.

Well, the review is ongoing. As I mentioned I think on our last call this is a topic that we spend a lot of time talking about internally. We talk about with our Board every time we get with them. So capital structure is always an important subject. I think you've seen us we are committed to the return of capital up way the accelerated rate pace that we demonstrated here in the first quarter show that we are committed to being active against that new share repurchase authorization. That's the outstanding question really for us is not what to do with accumulated extra capital where we've shown a clear commitment to increasing the dividend and now doing more share repurchases. The open question is really around should there be additional leverage at work in the business. And that's the piece that we are continuing to needle around internally and with the Board. Our leverage ratio right now on an adjusted basis with the store leases we think that's the appropriate way to evaluate our commitment is just over 2x. And I think clearly the business can support more of the questions should we do that and by how much. So we are continuing to evaluate. We have a good team of folks advising us and we are going to spend some time with Board on the subject as well.

And for our next question we go to Ike Boruchow with Wells Fargo.

Hi, everyone. Good morning. Congrats on the nice quarter. Just two questions. The first -- the first part just to go through the Q2 guide. So the sales are a little slower and you talked about due to the timing of shipments at Carter's wholesale. I guess first question is, is that a shift that fell into Q1 or is that shift that will push into Q3? Is there anything going on there that differs from your plan from when you started the year?

I'd say largely we had some volume that shifted forward to the first quarter, that spread some amount that shifted later into the third quarter but it primarily ineffective, shipments moving from Q2 as originally planned into the first quarter.

Got it. Okay. And then on that sales base for Q2, the implied EBIT margin erosion I think it is around 150 basis points. Just seems a little odd given the gross margin performance in Q1 so can you talk about what exactly driving that? Whether it is elevated spending or shift in SG&A or anything on the gross margin line? Thanks a lot.

I think one thing to note it is a smallest quarter of the year. You can have the relatively small number of pennies have disproportionate effect in terms of the reported our percentage range that they were talking about. So that's one thing to consider. Certainly the revenue moving forward into the first quarter is an issue. And we are planning good gross margin performance. We are planning expansion year-over-year in our gross margin. And the other variable would be spending. We do have some things that are ongoing right now in terms of the investment agenda that will weigh a bit on the quarter. And then -- beyond that just the ongoing effects of foreign currency both translation and this dynamic having fewer international consumers in our stores and online.

We go next to Anna Andreeva with Oppenheimer.

Great. Thanks so much. Good morning, guys. And thanks for taking our question. I guess hoping to understand the expectations for our earnings growth acceleration in the back half. Just percent sake there, how do we think about gross margin for the year? I think you said up modestly in the second quarter. They were up very nicely in 1Q and inventories look very clean and finally just what's driving you guys to take the earnings guide up for the year this early on? Thanks.

Sure. Well, thanks. So Anna the second half represents the largest proportion of the earnings base as well so it's a bigger opportunity to grow earnings just in general. We are planning for some acceleration of revenue growth in the second half. I'd say a larger contribution from our retail and e-commerce businesses here in the US. We are expecting that there would be less of a drag from foreign currency both from a translation and hopefully the drag that in the liquidation activity that we had a year go related to the international consumer will be lessen in the second half. We are expecting good contributions from the other portion of our international business from Canada, as Mike mentioned we have big plans for China e-commerce so lot of that volume comes now in the second half. We are planning for margin expansion in the second half. I'd say SG&A right now that we are planning it, it has a bit lower growth rate than what we are forecasting for the first half of the year. So all that combined gives us confidence to say business will have a stronger earnings contribution profile in the second half. Is this relates to increasing the forecast? I would say our operating assumptions for the full year are largely consistent. The raise in the EPS guidance really reflects the strong year-to-date share repurchase activity that we've accomplished so far.

For our next question we go to Robert Ohmes with Bank of America Merrill Lynch.

Hey, good morning, guys. Nice quarter. Hey actually just two quick questions. Mike your further -- every quarter you get a little further along and I was -- in terms of the growth of your dotcom business versus the growth of your brick and mortar business. Is there anything you can share incrementally on sort of you have the credit card data and lot of these, is the crossover customer increasing, decreasing, are you getting new customers on dotcom versus stores or maybe just remind us and some insights what's going on there? And then the other just quick question, I apologize if you had addressed this before but the Cat and jack launch coming at Target just any color and any expectation if that could impact your business with Target at all? Thanks.

So I'll take the first one. In terms of e-commerce Brian will address the Cat and jack, so e-commerce business has been particularly strong. This even despite the weakness in terms of international demand on the US website. So I think we had shared with you in the years past. And one point in the early days we saw about 45% of the demand on our US website was coming from international guests and that has dropped to closure to 25%. And even with that drop we've seen terrific performance on our -- in terms of online demand. So I'd still say the vast majority of the customers that we have shop in the stores. They like the stores. They like to visit the store. Our stores have been described as a candy store. You go in there are all these rich colors, beautiful products and increasingly as people shop online they like the convenience of coming back in the store. So we are seeing a very good performance online that Richard has shared with Taposh in the stores is largely from international demand. And we hope that's settles down in the second half when exchange rates start to normalize year-over-year. I'd say the information we have would suggest that the lion share of the customers that we have shop only in the stores. The others -- there are some percentage that only shop online and then there is another relatively small portion that shop both online and in store. That's our most valuable customers though. Those who shop both online and in the store are by far most valuable customer. And we continue to see good cross brand shopping. So that's why we are continuing roll forward the side-by-side stores. Consumers like the physical representation of the online experience. Online you can shop Carter's and OshKosh, go back and forth between the two brands, one easy convenient checkout. And they like the fact that the stores are now modeled in a similar way. So we are expecting good growth. Online increasingly Robby we will be combing these just as other retailers have done. We are combing e-commerce and the stores as we look at the business. It's increasingly difficult to distinguish where the transaction starts. We have some good omni-channel initiative rolling out in the second half where they can --consumers can easily shop online and pickup the product in the store and so when you put the two together I would actually say we are delivering pretty good performance.

That sounds great.

Robby, regarding your Target question say we have a significant business with Target with three exclusive brands with them just when you fresh it first and genuine kids OshKosh brand. The baby category has been growth opportunity for them. But we feel our brands are well positioned there. We are the lead alternative to private label and Target understands from a cat and jack standpoint. We do speak with them often. They are launching their brand. They are very successful with launching brands. So we expect them to do be successful with that. We wish them well. That brand is basically replacing as we understand two existing private label brands on their selling floor. So I think they will do a good job with that. But we have a strong partnership with them. We'll continue to do a good job for them. We continue to invest in brand presentation with our three exclusive brands and I think we'll continue have a significant presence there. So we wish them well.

For our next question we go to Susan Anderson with FBR Capital Markets.

Good morning. Congrats on a good quarter. I was just wondering if you can talk about just investments that you are making this year. Seems like SG&A as we see little bit more than expected in first quarter and it just sounds like you are making a lot of omni-channel investment. Maybe if you could kind of give a quick run down where those investments are going this year?

Sure. So I stays across that the categories that Susan you mentioned first and foremost I'd say technology. So there is a whole range of initiatives around omni-channel that we are pursuing as the stores and e-commerce channels are converting more and more their capabilities that consumers expect and so we are bringing that spare , Mike mentioned one of them that's something that we are rolling out. We are also in the process of addressing some of our long standing enterprise systems that quite honestly are outdated and need to be replaced. We are in the process of upgrading of our core financial systems that will go live later part of this year. But there is a fair amount of spending and efforts that's going into that initiative. Marketing would be another area where we have decided just to spend more here in the US market primarily. Our study show that we are under index that some of the benchmark that are out there. We think this is important way of continuing to drive traffic particularly to the store. So I think those are primarily where the investments are coming from.

Great. That's helpful. And then I think you called out in addition to just go forward on wholesale side for Carter's demand, did you mean by that it had slowed into the second quarter whole sale ? And if so is that across all the channel?

Well, no. That the comments that we have some shipments that were originally planned to occur in the second quarter with go forward into the first quarter. Beyond that we did have somewhat of timing benefit related to SG&A. We are just some things move to the right and that spending is expected to happen in the second quarter and beyond.

Got it. Okay. That’s helpful. And then one last question on China and Brazil. And do you think it hurts at all those online sales in the US coming from those countries now that you guys have operations there? Or how should we think about that?

It is for sure it does. It is easier to -- does the brand is more accessible, to more convenient to shop in China now that we have the Tmall website. From what we understand we would have seen that drop in the United States anyways given the issues that is going on in China. We would have seen that drop on our US website. Foreign thing as always when we combined the performance we are seeing in China on Tmall together with the business that we still see on our US website. We are forecasting that the sales to China online will be over 50% this year. So that initiative is progressing very, very nicely. That should be a nice source of growth for us in the years to come.

We go next to Steve Morato with TL King and Associates.

Good morning, everybody. Mike you mentioned earlier in the call that there are additional direct sourcing initiative that might get you over the 50% barrier. Can you talk about, would that be accelerated from 2017 or is that mean beyond 2017 and also can you be a little bit more specific about those categories?

Sure. It's -- I would say it's beyond 2017. Our focus right now is to complete phase one of the initiative that we launched about four or five years ago to go from what was at the time a 100% agent based sourcing through largely through Li & Fung, they have been great partners, they continued to be great partners, they will continue to be important part of our sourcing capabilities. As we approach the goal of being 50% direct source by 2017, we've been asking ourselves where we go from here. What else is possible? We build a first class team in Hong Kong. We've got some portion of that about 150 or more people helping support the direct sourcing operations for us. We think they are capable of doing more. So we are revisiting what's possible beyond 2017. But my guess is over the next year or so we will be articulating a strategy that takes our direct sourcing capabilities beyond that 50% goal.

Great. Thank you. And Rich just to underpin your comment share count that's expected in the fiscal year 2016 EPS guidance is exactly what and does it assume further share repurchases from this point forward?

So the guidance Steve reflects the cumulative year-to-date repurchases that I mentioned and are reflected in the press release this morning. The guidance doesn't exclusively have any additional share repurchase benefit. That certainly a possibility but as you know there are a number of variables that go into forward looking share repurchases. It becomes very difficult to base your guidance on that. So it's -- if we do some additional share repurchase, you are right, there some upside that might be possible for EPS but there is a lot of variables that can go into that.

And we go next to Steph Wissink with Piper Jaffray.

Thanks. Good morning, everyone. And just a few really quick ones for us. The first, Mike, could you talk a little bit about the e-com profitability threshold? Where are you at relative to that curve? And then second just update on the loyalty program adoption. I know you rolled out new loyalty program, seems like and getting some traction at the store level. I am just curious about some of the utilization and number of members there? And then last just on increased marketing spend. If you can give us any insights into the next between traditional format, maybe some of the new digital initiative that you have.

Sure. We couldn't be more happy pleased with the profitability of e-commerce. It is I would say its comparable year-over-year but the margins, the operating margins on e-commerce are rich and so they are well into mid 20% operating margin range at least in the first quarter. In terms of loyalty, we've made good progress. We are seeing a good response to it. I think last check we have some portion about 7 million people enrolled. We are seeing good redemption, good spending upon redemption. Higher sales per customer so all the metrics would suggest that has been very effective way of driving more people to our brands both online and in the stores. Then with respect to marketing, we are stepping the marketing particularly with the launch of this new little baby basics. And probably more than half of that marketing will be in digital. We will continue to do some good things in terms of direct marketing. It has been very highly effective. The beautiful things that you get in your home, the email has been effective but increasingly we have wonderful ways to connect with the consumers through digital marketing. So keep an eye out for the new launch of little baby basics that will be making some noise with that starting middle to end of May.

Thank you guys. Imagery does look beautiful and that's a tongue twister name. Thank you.

And for our next question we go to Kate McShane with Citi Research.

Hi. Thank you for taking my question. Just in the prepared comments you had mention promotional activity a few times. I just wondered if anything is changed here, if this is a continuation of what you have been seeing last several quarters and what you anticipate for the rest of the year.

Kate, I'd say overall the Q1 retail environment. It remained really promotional. Most retailers posting different messages to drag traffic is that it has been uneven and I think there was some activity in the market too to respond to the fact that Q4 was soft for lot of national retailer so they had to promote more heavily to clear out some of the carryover goods. We saw it category based and total store and total site based. I know there at least some folks, these small customers is actually promoting more aggressively online even in store which we found interesting. So we are a bit for promotional than last year. But despite that environment we still are able to grow our AUR which we felt good about.

Okay. Great. That's helpful. And them my second question was just on the refresh. I just wondered if you were getting any incremental space in your wholesale account because of it. And where we see refresh of other categories either in the Carter's or OshKosh brand over the next year?

I would say couple. First of all, we are really excited for the customers to see this -- we call the new arrival was little baby basics where we have innovated it and we feel the continued innovation of that product as well as other is critical to remain and grow our market leadership. So I think you will continue to see us innovate and brand things where it makes sense. It's our core product, this one largest category in the company and it's really -- it's going to be beautiful launch with emotional marketing and imagery that's relevant to the new moms. To tell you just a little bit about it. There is going to be celebration of some of our old products like the original bodysuit, our sets business and then what we call little extras which have complete new look. So we are very excited about it. The national retailers have seen it. They are excited about the May launch. It should be a good opportunity for us and for them. That said, it is a replenishment business. So we have a significant launch. We go out and we set the fixtures, there are multiple fixtures in virtually every account that we are in as well as our stores and online. We set the proc and then the proc is replenished as the customers find as demand slow. So we will see with that sell through is the work, excited about the results.

And with that ladies and gentlemen, we have no further questions on our roster. Therefore Mr. Casey, I'll turn the conference back over to you for any closing remarks.

Thank you. Thanks very much. Thank you all for joining us this morning. We appreciate your interest in our business. And we look forward updating again with our progress in July. Thanks very much. Good bye.

And again ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.