Michael Casey – Chairman and Chief Executive Officer Richard Westenberger – Executive Vice President and Chief Financial Officer Brian Lynch – President

Kate McShane – Citi Research Anna Andreeva – Oppenheimer Susan Anderson – FBR Capital Markets Omar Saad – Evercore ISI Jim Chartier – Monness, Crespi, Hardt John Kernan – Cowen and Company Ike Boruchow – Wells Fargo Janet Kloppenburg – JJK Research

Good day everyone, and welcome to Carter's Second Quarter 2017 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. [Operator Instructions] Carter's issued its second quarter 2017 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 as 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. Please go ahead, sir.

Thanks, very much. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I'd like to share some thoughts on our business with you. We had strong growth in the second quarter, with sales and earnings exceeding the estimates we shared with you in April. We achieved growth in our wholesale, retail and international segment. Traffic to our brands was up. ECommerce demand was strong, and our co-branded stores drove positive store comps for the quarter. Our results also reflect the benefit of our new growth initiatives, which include the acquisition of Skip Hop, our new relationship with Amazon and our expansion in China. Given the contribution of these new growth initiatives, together with the strength of our fall and holiday product offerings, we are forecasting a strong second half and reaffirming our sales and earnings guidance for the year. Our second quarter got off to a strong start with the benefit of the Easter holiday and related spring break shopping. May sales were down a bit to last year, with demand for summer products shifting to the right. June was the strongest month of the quarter in terms of sales growth, where we saw an acceleration in online demand for our brands. Our retail sales have continued to be good into July, with comparable sales up over 3% order-to-date. ECommerce continues to be our fastest-growing highest-margin business. With the investments we've made in eCommerce capabilities, we believe we're well positioned to benefit from the secular shift to online shopping. We're seeing significantly higher demand coming from mobile devices with related sales up 55% in the second quarter. We'll be launching a mobile app later this year to improve the convenience of shopping for our brand. We believe this new capability, together with other investments in omni-channel technology, will strengthen our position as the best-performing company in young children's apparel. We continue to see a good response from consumers choosing to buy online and pick up their purchases in our stores. This online option is a traffic driver to our stores. In the second quarter, about 20% of our online orders were picked up in our stores, and 30% of those customers made additional purchases during their store visits. Recently, we launched a new technology in our stores, which provides consumers the convenience of shopping the full scope of our product offerings online. Going forward, if we're temporarily out of a product a consumer wants in our store, we'll be able to save that sale and ship the product to her home for free. I'd encourage you to visit our website to see the recent improvements to our online experience. We believe we've improved the presentation and scope of our product offerings and improved the overall site experience. We have one of the best-performing eCommerce businesses in young children's apparel. According to third-party research, our eCommerce business was the second-largest contributor to the growth in online sales of young children's apparel last year, second only to Amazon. We expect our eCommerce sales to grow by $300 million over the next 4 years. Our positive store comp in the second quarter was driven by our co-branded stores, which continues to be our best-performing store model. These stores provide the most productive components of our Carter's and OshKosh B'gosh product offerings in one convenient location. We plan to open about 200 more stores over the next four years, and most of these stores will be in the co-branded store format. We expect our store growth plan to contribute about $200 million or more in sales by 2021. We've begun to market our new Skip Hop brand to our 11 million active customers. We've recently launched a beautiful assortment of Skip Hop in 50 of our stores in the United States. This is the first step of the full rollout to our stores, including Canada planned next year. Earlier this week, we launched Skip Hop on our website, exposing the brand to over 70 million site visitors a year, and we added Skip Hop to our Rewarding Moments loyalty program. The timing of this launch is meant to coincide with the back-to-school shopping season. Among other products, Skip Hop is known for its adorable backpacks for young children. We expect Skip Hop to contribute $90 million to $100 million in sales this year and $200 million in sales over the next four years. The acquisition of Skip Hop enabled growth in our wholesale business in the second quarter and helped to offset a decline in demand for mall-based department stores. Thankfully, we're seeing some stabilization in what has been lower seasonal bookings over the past year. We currently expect Spring 2018 bookings to be slightly lower than Spring 2017. Total growth in wholesale this year is expected to be modest, given our customers' store closure plans. That said, we're encouraged by the strong growth of our brands online with the national retailers, with sales up over 25% year-to-date. We're also encouraged by the feedback from the national retailers on the performance of our new Little Baby Basics product offering launched in May. This is a high-margin replenishment program and a traffic driver for the national retailers. Carter's is the best-selling apparel brand for families with newborn children. Our research shows that 85% of families with newborns purchased our Carter's brand this past year. Our new business with Amazon is off to a strong start. The growth is being driven by our new Simple Joys brand designed exclusively for Amazon's Prime customers. It's a differentiated product offering comprised of a special multipack essentials for families with young children. We now have four brands selling with one of the best-performing retailers in the United States. We're also exploring opportunities to expand the Amazon relationship in international markets. We are forecasting growth in our wholesale business this year. We expect the lower seasonal bookings will be offset by the strength of our Little Baby Basics product offering and the contribution from Skip Hop and Amazon. With these new growth opportunities, we are forecasting about a $100 million in growth in our wholesale business over the next 4 years. Our international sales grew about 15% in the second quarter and are expected to exceed $400 million this year. About 30% of Skip Hop's annual sales are to international market. We continue to see good growth in Canada, with sales planned up about 10% this year. Our Canadian team has enabled us to achieve the Number 1 market share position in young children's apparel in both stores and eCommerce this past year. Our new business in China is ramping up nicely. We believe Pou Sheng, our wholesale partners, is on track to open over 50 Carter stores for us this year. If those stores continue to meet our shared performance objectives, Pou Sheng plans to open 200 or more stores over the next 5 years. Our sales in China are forecasted up about 50% this year. We expect our international sales to grow to over $600 million by 2021, driven by Skip Hop, Canada and China. We continue to see good performance from our supply chain in the second quarter in terms of on-time deliveries and product costs. We're forecasting slightly lower product cost for Spring 2018 and better margins into the first half of next year. In summary, we made good progress, improving our business in the first half and expect to achieve our growth objectives this year. Skip Hop, Amazon and China are providing new sources of growth for us. We're fortunate to have multiple opportunities to grow our business and extend the reach of our brands to families with young children throughout the world. Given the strength of our brands and global distribution capabilities, we believe we're on track to achieve our longer-term goals of $4 billion in sales with better margins by 2020. I want to thank our employees throughout the company, who helped us achieve the results we're reporting this morning. I'm grateful for their passion for our brands and their commitment to help us execute our growth plan. Richard will now walk you through the presentation on our website.

Thank you, Mike. Good morning, everyone. I'll begin my comment on page 2 of today's presentation material. As Mike noted, we had a very good second quarter delivering solid top and bottom line growth. Consolidated net sales grew 8% over the last year, driven by strong growth in our U.S. retail businesses and the contributions from Skip Hop, which we acquired in the first quarter of this year. Skip Hop added approximately 4 percentage points to our year-over-year sales growth in the second quarter. Adjusted operating income grew 2%. Consolidated operating margin declined 50 basis points in part due to our continued investment across the business. Q2 adjusted EPS with $0.79 per share, growth of 10% over last year. Turning to Page 3, we've summarized our year-over-year sales performance in the second quarter. Sales in our U.S. retail segment grew 11%, with good contributions from both stores and eCommerce. U.S. retail comparable sales grew 6% benefiting, in part we believe, from the shift of Easter and Spring break demand into the second quarter of this year. International segment sales grew 15% on a reported basis, with even stronger growth of 19% on a constant-currency basis, driven by solid growth in Canada and the contribution from Skip Hop. Sales in our U.S. wholesale business were up modestly compared to last year, reflecting the addition of Skip Hop revenue, which was mostly offset by lower demand for our seasonal product. I'll cover our business segment results in more detail in a moment. Moving to the P&L for the second quarter on Page 4. Consolidated gross margin was 43.9%, down 20 basis points compared to the second quarter of last year. We saw a nice mix benefit versus last year, given the growth in our U.S. retail businesses. Offsetting this were several factors: Skip Hop is mostly a wholesale business, which carries a lower gross margin, and we had some higher costs related to inventory and the continued investments in our direct sourcing capabilities in Asia. Gross margin for the first half was comparable to last year, and we're planning for solid gross margin expansion for the second half of 2017. Adjusted SG&A grew 10% in the second quarter, and I'll provide more color on SG&A in a moment. Interest and other expense declined 8%. We had some foreign currency transaction gains in the quarter, which offset higher interest expense as short-term borrowings have increased slightly, largely a result of the Skip Hop acquisition earlier in the year. Our effective tax rate declined about 80 basis points versus a year ago, and our average share count was approximately 4% lower as a result of share repurchases. So with all of these input, second quarter adjusted EPS was $0.79, up 10% compared to $0.72 last year. Turning to Page 5 and SG&A. Consolidated adjusted SG&A increased 10%, principally due to higher spending in our retail businesses, both in the U.S. and Canada. This spending includes operational cost related to strong growth in eCommerce sales and investments such as in our new stores, marketing and technology initiatives, which we believe strengthen our long-term capabilities and growth prospects. Our consolidated adjusted SG&A rate increased 50 basis points, the majority of which we attribute to the higher mix of U.S. retail sales versus a year ago. Skip Hop costs, which weren't in our cost structure a year ago, were the other significant items contributing to expense growth in the quarter. Excluding these new Skip Hop expenses, SG&A grew about 5.5% versus last year. SG&A in the second quarter came in better than we had forecasted, reflecting debt expense discipline and some shift in spending to the second half of the year. On Page 6, we've summarized for your reference some of our more significant investments over recent years. We're fortunate that our performance has allowed us to invest across multiple areas, as we build upon our achievements as the market leader in young children's apparel. We're focused on growing net sales, improving our profitability and efficiency, building our direct sourcing capabilities in Asia and growing the presence of our brands outside of the United States. In our retail business, Mike mentioned some of our recent efforts in implementing our omni-channel capabilities; customer response and utilization of these new offerings has been very positive. We also have a number of other initiatives underway in retail focused on inventory management and pricing, which we believe will help us to ultimately run a better and more profitable business, especially in our retail stores. Page 7 recaps our balance sheet at quarter-end and some highlights of our cash flow performance in the first half. Quarter-end inventories were up 4% versus last year. Excluding Skip Hop, inventories decreased 1%. Overall debt increased about $80 million compared to last year, reflecting short-term borrowings to support seasonal working capital needs and our use of cash in the first half for the purchase of Skip Hop and for our continued return of capital to shareholders. Free cash flow in the first half was $73 million, up from $36 million last year, principally driven by favorable movement in working capital and lower capital expenditures. Consistent with our past experience, we expect to generate most of our annual free cash flow in the second half of the year. In the first half, we returned a total of $134 million to shareholders, comprised of $98 million in share repurchases and $36 million in dividends. We currently have approximately $160 million remaining under our share-repurchase authorization. Now turning to Page 9 with a summary of our business segment performance in the second quarter. It's worth noting that the second quarter is smaller compared to other quarters of the year, and as such relatively small dollar movement can result in larger variances across the P&L. Our consolidated adjusted operating margin declined by 50 basis points. We posted 30 basis points of margin improvement in the U.S. retail segment and also leveraged corporate expenses by 70 basis points. For the full year, we're expecting our consolidated adjusted operating margin and the margin of our U.S. wholesale segment will both be strong with only minor dilution, largely a result of the addition of Skip Hop. Moving to our individual business segment results, beginning with U.S. retail on Page 10. Total U.S. retail segment sales in the second quarter increased 11% versus last year. Our total U.S. retail comp increased 6% comprised of a strong eCommerce comp of nearly 28% and a slightly positive store comp. We continued to see good performance from our co-branded and side-by-side format stores. In the second quarter, we opened 8 net new stores. And over the last 12 months, we've added 43 net new locations to bring our U.S. retail store count to 810 locations. Segment operating income in the second quarter improved to $42 million, up from $37 million last year. Segment margin improved by 30 basis points to 10.8%, reflecting strong growth in our high-margin eCommerce business, lower product cost and expense leverage from the strong retail comp. For full year 2017, we are forecasting that margins in the U.S. retail will be roughly comparable with 2016. Moving to Page 11, we are often asked by investors why we're opening stores when many other retailers are closing stores. We put this page together to summarize our thinking on the role that stores play in our overall retail strategy. First and foremost, our stores are where customers are shopping. 87% of our retail customers shop in our stores, and 74% shop only in our retail stores. We believe the stores complement our growing eCommerce business and also provide an important source of new customers for our brands. Historically, our stores have also represented very high return investments, generating high productivity and rapid payback of their invested capital. On the right side of page, we've listed a number of ongoing initiatives and areas of focus intended to strengthen our retail store business. These activities include refinements to our store format and size, merchandising initiative and new technologies. Building on this year's planned openings, we seek continued opportunities to open additional highly-productive new doors over the next several years. We continue to rigorously measure and evaluate our retail store performance. If something changes in the return profile of new stores or the role they play in growing the reach of our brand, we intend to make the appropriate changes to our strategy going forward. On Pages 12 and 13, we have photos of new co-branded stores in the Houston and Salt Lake City markets. Both of these stores are off to good starts. On Page 14, we've provided some Carter's and OshKosh inventory from our recently refreshed website. We believe the site's fresher look, improved navigation and other new features will provide our customers with a better shopping experience. Turning to pages 15 and 16 with an update on Skip Hop. We've made good progress integrating Skip Hop into our business. Earlier this week, we went live with a new Skip Hop tab on carters.com. We now have the entire Skip Hop product assortment available on our website, and we've integrated fulfillment for these products into our multichannel distribution center here in Georgia. Page 15 shows the new Skip Hop landing page on our new website. We also recently rolled out Skip Hop fixtures to approximately 50 stores, and Page 16 shows 2 of the various fixture configurations we've been testing. Consumer response to Skip Hop products online and in our stores has been very strong. Our stores associates in particular are excited to have this popular new brand to offer to our customers. As a reminder, we expect Skip Hop to contribute approximately $90 million to $100 million in net sales to our 2017 results and to make a modest contribution to earnings. Over time, our objective is to double Skip Hop's net sales. Turning to Page 17 and results for our U.S. wholesale business for the quarter. Second quarter net sales in wholesale grew approximately 1%, principally due to the contribution from Skip Hop. Excluding Skip Hop, net sales declined 6%, which is roughly consistent with our planned decline in seasonal bookings. U.S. wholesale segment operating profit was $36 million compared to $42 million last year. Segment margin was 16.6% compared to 19.3% last year. The margin decline reflects the addition of Skip Hop business, changes in sales mix and higher bad debt provision. Our outlook for full year margins in U.S. wholesale is good with our forecast indicating 20% plus profitability in this part of our business. We expect demands for our fall seasonal products to decline in the mid single-digit range largely consistent with our previous year. Full year net sales in U.S. wholesale are expected to increase in the low single-digit range. This outlook reflects the benefit of Skip Hop, improved replenishment product demand, including Little Baby Basics, and good progress with sale of our new Simple Joys brand with Amazon. Looking ahead to the first part of next year, our initial outlook is the demand for Spring 2018 seasonal product, excluding any contribution from Skip Hop, will decline slightly from this year. This would represent notable stabilization from the more significant decrease we've experienced in this part of our business in 2017. One of our key priorities is to support the growth objectives of our wholesale customers and improving and growing both their stores and eCommerce businesses. We continue to actively partner with customers to ensure that our brands are presented in a compelling way on the sales floor and online. On Pages 18 and 19, we've included some images of the latest Carter's floor sets at Kohl's and Babies"R"Us, two of our significant wholesale customers. On Page 20, we have the screenshots of the landing pages for our Carter's family of brand on macys.com, walmart.com, target.com and Amazon. As Mike mentioned, sales of our brands on our wholesale partners' websites have been growing strongly. Moving to Page 21 and international segment results for the second quarter. International had a good second quarter with net sales growing 15% on a reported basis and 19% when adjusting for currency movements. This growth reflects the benefit of the Skip Hop acquisition and growth in Canada and China, which was partially offset by lower demand from wholesale partners in other markets. In Canada, total retail store sales increased 9%, driven by a store comp of nearly 6% and the benefit of new store openings. International eCommerce grew 17% in the second quarter, principally driven by strong growth in Canada with a higher contribution from China as well. Net sales to international wholesale customers grew 28% in the second quarter, driven by the benefit of Skip Hop and growth in China, which was partially offset by a decline in demand from partners in other markets outside the U.S. International segment operating margin was 9.4% in the second quarter, which compares to 12.7% in the prior year. This decline reflects a change in sales mix versus a year ago, higher China-related costs, increased bad debt provisions and the inclusion of Skip Hop. Pages 22 through 26 feature several of our new international stores as well as some eCommerce imagery from 2 of our international wholesale partners. Page 22 is a new co-branded store in Ontario, Canada. Our new stores in Canada continue to perform well, with some of the recent openings being slightly smaller-format stores located in high-traffic, enclosed shopping malls. Page 23 features a new Carter's store opened by our wholesale partner in China located west of Shanghai. Our partner in China has now opened 25 stores, and we expect at least another 25 stores to be added by the end of this year. On Page 24, we have a beautiful new Carter store recently opened by our partner in Turkey. We see international eCommerce as a significant opportunity for our brand. On Page 25 and 26, you can see how the Carter's and OshKosh brands are presented on zalando.com, which is a leading eCommerce retailer in Europe as well as with Riachuelo, a retail business in Brazil. And lastly on Page 27, we've included Little Baby Basics inventory from the Carter's store on Alibaba's Tmall website in China. We're planning for another good year of growth online in China in 2017. Our international partners do a great job presenting the Carter's and OshKosh brands to consumers around the world, both in stores and online. These partners currently operate over 800 retail stores as well as eCommerce sites in approximately 65 countries. Page 28 summarizes our year-to-date performance. We largely achieved our plans for the first half of the year. Year-to-date, net sales growth was 4% and adjusted EPS was roughly comparable to last year as a result of higher spending in the first half. Consistent with our plans coming into the year, and as wholesale represents the smaller proportion of our business this year and overtime, more of our sales and earnings growth is weighted to the second half than in previous years. So moving to Page 29 for our outlook on the third quarter and the balance of the year. For the third quarter, we are forecasting net sales to grow approximately 5% compared to last year, driven by our U.S. retail businesses and the contribution from Skip Hop. We expect third quarter wholesale growth to be muted somewhat due to a change in the timing of shipments versus a year ago. Adjusted EPS for the third quarter is forecasted to be approximately comparable to $1.61 posted in the third quarter of last year. This projection reflects continued spending on our growth initiatives, namely new stores, technology and marketing. It also includes China investments and Skip Hop integration efforts. We're anticipating a very strong fourth quarter led by solid sales growth across all segments, gross margin expansion and the benefit of share repurchases. For the full year, we are reaffirming our prior guidance. 2017 net sales are expected to grow 4% to 6%, adjusted EPS is forecast to increase approximately 8% to 10%, compared to the $5.14 in fiscal 2016. We anticipate another solid year of operating cash flow in the range of $300 million and $325 million and CapEx of approximately $90 million. With these remarks, we're now ready to take your questions.

[Operator Instructions] And for our first question, we go to Kate McShane with Citi Research.

Good morning. Thanks for taking my question. I was wondering if you could talk a little bit more about the U.S. wholesale trends. Just, specifically, were there any benefit to U.S. wholesale from the replenishment business, or does that contribute more in the second half of the year? And when it comes to the channels, I think you've highlighted before that particular channels weighed more on your results than other channels. So any detail around that would be helpful.

Yes, Kate, just to give you some color. The replenishment business has been very good. We launched our beautiful new Little Baby Basics in May. Selling has been good across all channels, including internationally. Our major wholesale accounts are realizing mid- to high-single-digit sales increase since we launched that. And the forecast is for that to continue through the lifecycle, which actually runs through Spring. Skip Hop is almost entirely replenishment business and the selling of that brand has been very strong as well, so we believe shipments even to our top 4 or 5 accounts in Skip Hop will be up over 35% this year. That puts the replenishment component of wholesale at about 25% of the total. In terms of just color for the overall bookings, I'd say that while the overall retail industry and many of our customers are challenged. I'd say we're seeing some nice wins based on how we're reacting to the channel shifts from stores to online. We are fully supporting our partners efforts to have online sales, as Richard had said. And the online sales of our products with our customers is actually up over 25% over last year, so we're happy about that. Of course, we got the new Amazon relationships as well. The bookings are down slightly from last year, and that's primarily due again to the mall-based department store sector. That was historically about 25% of our businesses in wholesale. It's right-sized now down to about 13% of our business. So that's a component that you had asked about. So I'd say all in for 2017, we see that business up low singles, as we've commented on. Within that the base Carter's and OshKosh business is now only going to be down low-single digits, and we're up against a mid-single-digit bookings decline as you know. So the replenishment business, Amazon and other initiatives are expected to offset a good portion of that decline in the upfront bookings. And then longer-term, we do see opportunities for good growth in wholesale, good low single-digit or more growth based on the strategies that we're pursuing across our multiple brands.

That's helpful. Thank you. And then my second and final question is that within the retail comp, can you comment on outlooks in particular and the trends there?

The outlets continue to be down. That's particularly the drive-to outlets. The best performance we're seeing is in the co-branded stores and the side-by-side stores. And the model for the stores going forward will be in that co-branded store format. We're seeing very good performance from the co-branded stores.

And for our next question, we go to Anna Andreeva with Oppenheimer.

Great. Thanks so much. Good morning guys and congrats on really strong revenue results. A couple of questions. On profitability by channel, hoping you could parse out how much of the margins decline in wholesale was attributable to Skip Hop and Simple Joys as well as the bad debt expense that you called out. Should we expect bad debt to be more or less non-recurring in nature? And secondly, I think you mentioned you still expect solid gross margin expansion in the back half. Should we expect gross margins up in both 3Q and 4Q? And what kind of promotional cadence are you guys expecting in the back half?

Sure, Anna. I'll start out. As it relates to gross margin, we are expecting gross margin expansions in both Q3 and Q4. As it relates to the decline in wholesale profitability, I don't know that I'll parse it out other than reiterating the factors that you mentioned. We had a bit higher bad debt provisions in the third quarter. We're obviously doing business with some customers that have some financial challenges and just sort of standard accounting practice to hang on to some reserves for our sales through that channel. Skip Hop has been diluted to the gross margin for the wholesale business. I would expect that, that will continue throughout the balance of the year.

You asked about promotions. We would see promotions back half of the year, at this point, as comparable to last year, that would be our plan.

Were they comparable during the second quarter?

Overall, I'd say with, you know, the slower start to Q1 across the industry, so that put a little pressure on the Q2. There were some aggressive discounting across there. We mentioned, we had a good Easter. We had a tougher Memorial Day. We had a very good 4th of July. So all in, we're happy with the performance. I would say that we were slightly more promotional in the quarter than we were last year.

Okay terrific. Best of luck guys.

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

Hi. Good morning. Thanks for taking my questions and good job on the quarter. I was wondering if you can maybe – so it sounds like SG&A is going to be the main pressure point in the third quarter; it looked a little bit lighter than you guys had thought in the second quarter. So should we imply that some of those investments, I guess, shifted in the third quarter in the back half?

Yes, that's correct. We did have some favorability that's more timing based, Susan, and that spending will happen now in the third quarter related to a few different things, I'd say principally the timing of technology initiatives as well as some hiring and HR-oriented costs.

Got it, okay. And when you talk about the sales up over 25% online to the national retailers, does that include Amazon? And then also maybe if you can talk a little bit about the growth of Amazon. I know it's probably kind of early but, I guess, how long do you think before you can see that offsetting the wholesale channel weakness? And then also, have you seen any weakness in sales to these smaller third parties that were selling on Amazon before?

So the 25% growth in wholesale with our national retailers excludes Amazon. Amazon is new business. It's ramping up beautifully, particularly the Simple Joys brand which was designed exclusively for them. And so we expect that's going to be a nice source of growth for us going forward. When will online sales offset the weakness in the stores? We're starting to see some stabilization now. The bookings over the last couple of seasons – seasonal bookings were down mid-single-digits. And now we're seeing slightly lower bookings for Spring '18. So we feel that we're starting to see the bottom in terms of the decline in the demand from the national retailers, particularly as it relates to the seasonal bookings. The core of the Carter's brand, Little Baby Basics, that business is particularly strong, and we're seeing good demand. That was launched in May. And that's an annual program. It's the everyday essentials for families with young children. That demand from the national retailers continues to be very strong.

Great, that's sounds very positive. And last one, it looks like the wholesale op margins were down a bit this quarter. Maybe if you could just talk about the pressure there?

Again so for the reasons that we cited in our remarks, Susan, we are making some additional provisions for bad debt in our core products for some of the credit rating issues. That's one of the factors in the quarter, and as I mentioned Skip Hop being added to the base. It's a different margin profile for that business relative to the core wholesale business.

Great. That's helpful. Good luck next quarter guys.

And we go next to Omar Saad with Evercore ISI.

Thank you. Good morning. Very nice quarter guys, congratulations. Wanted to ask about – one follow up on Amazon, you know kind of your experience on Prime Day. Looked like the Carter's brand was the participant there. Anything you've learned from that day and then to follow up also, are – there still seems to be a lot of three-peat sellers out there in the bit of grey market Carter's out there on that platform and others. Are you starting to see a line of sight to when that maybe get cleaned up as you relationship with retailers like Amazon, online retailers like Amazon progresses?

Prime day was a very good for us. Good day for us and, we understand, good day for Amazon. And in terms of those third-party resellers, we don't actually know who they all are. And but some way, somehow, they get the product. We know some of the account. I would actually say there continues to be good demand from some of those retailers. We have no effort under way to try to clean that up. That's beyond our control. And so wherever that product ultimately gets to Amazon, it's ultimately coming from us. But we don't put much effort into trying to clean those relationships up. That would be more of an Amazon responsibility. But our business with Amazon, the new business with Amazon, is particularly good.

Got it. Got it. And then eCommerce, nice acceleration starting to approached 30% year-over-year growth. Maybe what you're seeing there? And are you able to use your loyalty program to see kind of customer-specific data, what's driving that eCommerce business and the acceleration there?

We are seeing very good traffic. So we're seeing a very good response to the strength of the product offerings, the strength of the marketing. We've had more effort in terms of targeting consumers understanding what age they're shopping for. What gender they're shopping for. Our eCommerce team – marketing teams have done a great job helping us to accelerate demand for eCommerce. The margins in that business continue to expand, continues to be our fastest-growing, highest-margin business. We see it as a traffic driver to the stores. Some of the new omni-channel capabilities, being able to buy online and then pick up the product in the store, that's been a nice source of growth for our stores as well. So we're seeing the consumers – some portion of that 87% of our customers like to shop both on in stores and online. So we're seeing most of the relationships with our customers, the new relationships start in our stores. And but the consumer based on the behavior, they like to shop both in-stores and online with us.

Got it. Yes, I was going to ask, is the online consumer new consumers? Or are they kind of pre-existing consumer who already are part of the loyalty program?

The loyalty program – last time I checked, some portion 90% of the transactions we have, both in stores and online, are tied to the loyalty program. And we just added Skip Hop to that Rewarding Moments loyalty program this past week. So that'll attract more consumers to the company.

Yes that acquisition seems like a big win for you guys. When can we expect it to rollout to the store – to the broader store base?

We're testing it in 50 stores just to understand what fixture productivity works best for us. And the game plan is to learn all we can from that. And then sometime next year, roll it out to all of the Carter's and co-branded stores and roll it out to Canada. So you'll see more of that later this year and into next year.

Thanks Mike. Appreciate all the insight.

And for our next question, we go to Jim Chartier with Monness, Crespi, Hardt.

Good morning. Thanks for taking my question. First on the bookings, how much of an impact is the Amazon having on the Spring 2018 bookings? I know it's still small at this point.

Jim, I don't know if we would give that level of detail. Again, it as an early relationship. Our selling is very good. We're actually at a little bit of a chase mode on Simple Joys, which we're excited about. But I don't know that we would parse out the exact bookings by account at this point.

And then how does Amazon compare to the rest of the business in terms of the size and replenishment?

Amazon, is actually we... The orders are prebooked. And since it's a unique brand, Amazon, they commit to the product and the orders upfront, so we book those as seasonal bookings, and then the shipments occur weekly to the distribution centers as the product continues to sell, Like I said we've been on a little bit of a chase mode. So although, they're prebooked we have been scrambling the jets, I guess I would say, to get product here quicker to make sure we fulfill the demand.

it's good to hear. And Richard, can you tell us when you expect to start to realize some of the benefits from the new technologies in the retail stores you've mentioned? The price optimization, inventory management and other initiative?

Yes, I would say that those 2 specifically we're in the process of implementing the technologies now. So it will be a stronger forward benefit later this year certainly into 2018. I think we're starting to see the benefit already of some of the new omni-channel capabilities that we've brought online. So those will be more near-term. But I think pricing, inventory management, assortment planning is a key component of that. Those will be the stronger forward benefits into 2018 and beyond.

Great. Thanks and best of luck

And for our next question we go to John Kernan with Cowen and Company.

Good morning everyone. Thanks for taking my question. So Richard, just on the SG&A front in Q4 does imply a pretty big step down in terms of overall dollar growth versus where you've been this year and last year in terms of the year-over-year growth. I'm just wondering if there's anything onetime-ish that enables the SG&A dollar growth in Q4 to come down to what seems to be a pretty good single-digit rate?

Well our forecast wouldn't have it be growing that lowly. So there might a little more balanced between Q3 and Q4 in our model, John. I will say that in Q4, that tends to be when we have more of the adjustments to incentive comp provisions, other sort of employee benefits, reserves and such that tends to have a bit of an effect on the overall spending growth rate. But certainly, we're forecasting that the growth rate will be higher in Q3 and then moderate somewhat as we get into the fourth quarter.

Okay. And then, it's just the math, if you look at international, I think, by 2020 you wanted it to be 15% of the total, and I think China is guided to $100 million plus. I'm just wondering the confidence you have in this and what you're seeing now that the partnership with Pou Sheng has grown a bit and you've been involved in these markets a little bit longer.

So China is ramping up beautifully. The relationship with Pou Sheng is terrific, they're doing a great job opening these stores for us. It's still early days, and we didn't start opening stores in China until the fourth quarter of last year. So we – on the last call and we still believe that China's probably, as we see it today, some portion of an $80 million to $100 million opportunity over the next four or five years. So it's a big market, a lot of beautiful children being born there everyday and we're seeing a good reception to the Carter's brand both in the stores and online. Our relationship with Tmall – Alibaba's Tmall website, continues to see good demand there. A lot of that demand is heavily weighted with some of the big promotional events in the second half. So we're forecasting our business with China to be up about 50% this year, and I think it's going to be nice source of growth for us over time.

Okay. And then just one final follow-up question. Just some of the trends of the bigger box partners and some of the things we've heard is that they're still in a cycle of de-stocking in terms of inventory. There's obviously some store closures on the department store side of things. So can you just help us understand the trends you're seeing within those bigger box partners?

I think, there's a couple of ways to look at it, John. First of all, the door closures, as we calculated about 2% of the doors that we do business with, which we find interesting, we closed about 2% of our doors every year. So we don't think that's significantly meaningful in terms of account-by-account, I think it's a transition that's happening out there and that the brick-and-mortar traffic is down, the mall base traffic in department stores are down and everybody is basically funneling efforts to digital marketing and to drive business on their websites. So we're trying to help them with that as fast as we possibly can given the insight we have in our own businesses. And now with our relationship with Amazon, we think that there's a lot of learning that we have, and we try to make sure that folks are aware of the right tactics and strategies to grow their online businesses. So it is been – it continues to be challenging industry like we said earlier on, we are feeling a little bit better about things and the way the business is transitioning. Some of our new strategies, and the fact bookings are only down very slightly to last year.

Okay. Thank you.

And we go next to Ike Boruchow with Wells Fargo.

Hi. Good morning everyone. Richard, can you elaborate a little bit more on the product cost situation. I think you said we should expect slightly lower product costs in the back half of the year. Can you just help us understand how that relates to what you saw in the first half of the year and then anymore color you can give us on your reads for the first half of '18?

Sure. Well, the trend towards – in product cost has continued to be favorable. I said that's been a benefit across the first of 2017, it should be a benefit to our margin here in the second half. We have visibility to our assortment for the first half of 2018, and I would say costs are down modestly year-over-year. So we're hopeful that, that will continue to be the trend. We really don't have much line of sight to the second half of 2018. That will be a next-6-months sort of a proposition for us to get better some intel on. But at least, the near-term outlook for product cost continues to be good for us.

Can you just talk about what the biggest drivers are that's giving you those benefits?

I'd say it's overall capacity in Asia. It's probably the biggest factor. There continues to be some pressure around labor and placement. Although, that has moderated a bit, over what we saw a couple of years ago. Cotton has stepped up a bit in cost in the market. But overall, demand that is coming from the U.S. and I would say from Europe, continues to be weak overall, and we're able to take advantage of that.

Got it. And just a follow-up question, Richard, I think you talked about timing, a wholesale timing shift that's hurting Q3 and I guess will benefit Q4. Can you give us anymore color there? Dollar amount that's shifting around just to help us with our models?

So there's probably a nickel or so of earnings in Q2 that would probably shift into Q3. Not a huge effect from wholesale volumes, a few million dollars or so and then the balance would be spending.

Got it. Thanks so much.

And we go next to Janet Kloppenburg with JJK Research.

Good morning everyone and congratulations on a very nice quarter. I wonder how we should think about wholesale margins going forward with the brick-and-mortar wholesale business coming down and the digital wholesale business growing and Skip Hop's impact. Will you be able to recapture your historically levels of wholesale margins that the highs that you witnessed in the past? And I also was wondering, as compared to the first half, you're looking for gross margins – I guess gross margins were roughly flat in the first half but down a bit in the second quarter. What is the benefit that will impact the second half to help the margins be better in the second half than they were, actually up year-over-year? And just lastly, with the announcement by Gymboree of closing 330 stores, I think probably that those stores will be closed over the next couple of months, I'm wondering if you see any positive impact to your business? Thank you.

Sure, Janet, on the gross margin question, I think there's a number of drivers that give us confidence that we're going to see more expansion in the second half versus the first half. First and foremost, it would be strong revenue growth in our U.S. retail business. So we've very strong growth planned in our stores business, good comp planned there, good comp planned in eCommerce. Canada is expected to have good revenue growth, which is by and large a retail business. As I just mentioned, we are going to benefit, we think, from lower product cost, that trend should continue here in the second half, with cost of those assortments. We have assumed that we will make some additional progress in our pricing in the second quarter, excuse me, the second half of the year versus the first half. But largely, the ongoing benefit of product costs and the ongoing mix shift of the business, which is toward their higher-margin businesses.

Your question with respect to Gymboree, we've taken a look at all of the site locations that they disclosed as part of their bankruptcy. And many of those locations are in high-priced mall locations, that's not part of our real estate strategy. There are some centers that may provide some opportunity. But I'd say by and large, their real estate strategy was very different from ours. Most of our stores are in high-value open air strip centers, and we've had good success with that. The economics are much more attractive for that store model relative to the mall model.

And the wholesale margin?

Wholesale margins going forward? Yes, I think they're encouraging. Can't look at the second quarter and draw conclusions on the trend in our wholesale margin, you have to look to the year. Our margins – our wholesale margins for the year will be, I would say, comparable to slightly down year-over-year, that's our current game plan, and they're down largely because today Skip Hop will weigh a bit on that margin. But that's where it is today. It will improve over time ,is our game plan. But I'd say, we're expecting good margins in wholesale this year. And early part of next year, we'll update you terms of what we expect going forward in the next 5 years. But for this year we will have good wholesale margins.

Okay, and then just lastly, can we expect or are you thinking that the current comp trend here in third quarter can be sustained as we go through the quarter?

That's our plan. We're hoping for a good solid three comp in each of the next 2 quarters.

Great. Thanks so much. Good luck.

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

Okay, thanks very much. Thank you all for joining us this morning. We appreciate your time, and we'll update you again on our progress in October. Goodbye, everybody.

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