Michael Casey - Chairman and Chief Executive Officer Richard Westenberger - Executive Vice President and Chief Financial Officer Brian Lynch - President Sean McHugh - Vice President and Treasurer

Kate McShane - Citi Ike Boruchow - Wells Fargo Susan Anderson - B. Riley FBR Heather Balsky - Bank of America Laurent Vasilescu - Macquarie Group Jim Chartier - Monness, Crespi & Hardt Jay Sole - UBS

Welcome to Carter's Third Quarter 2018 Earnings Conference Call. On the call today we have 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 todays prepared remarks, we will take questions as time allows. Carter's issued its third quarter 2018 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. With that, I’ll now like to turn the call over to Mr. Casey. Sir, please go ahead.

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. As reported this morning, we did not achieve our third quarter growth objectives, lower traffic over the Labor Day holiday, lowered demand from international customers and lower than expected replenishment trends all weighed on the growth that we had thought was possible. Thankfully in the weeks that followed Labor Day sales trends have improved significantly. Weather has turned cooler and demand for our fall and holiday product offerings is now trending ahead of plan. With respect to our performance in the third quarter by segment, we have the largest shortfall to our sales plan in our retail business. Comps were up less than 1%. We had planned comps up over 3%. We saw an unusual decline in traffic during our Labor Day holiday sale, 80% of our retail shortfall in the quarter occurred during our holiday promotion with comps down nearly 28% [ph] Our best analysis of the Labor Day weekend performance suggests our pricing was very competitive. But our marketing messages did not effectively communicate our strong value proposition. In the weeks that followed Labor Day, our retail comps were up 13% through the end of the quarter and we're currently seeing double-digit comp growth in the fourth quarter, with stronger traffic to our stores, higher conversion rates and better price realization, driven by the strength of our product offerings. In the third quarter, our new stores performed in line with our expectations. Our co-branded stores continue to be our best performing stores with comps up 6% in the third quarter and double-digit growth fourth [ph] quarter to date. Our co-branded store model is unique in the young children's apparel market. These stores provide two of the best known brands in one convenient location for families with young children. Our co-branded stores are our most productive stores and provide the highest return on investment relative to our other store models. Together with our side-by-side stores, our dual-branded stores have grown to be over 35% of our portfolio. Beginning this year, we plan to open about 160 more co-branded stores by 2022, improving the mix of these stores to at least 50% of our store portfolio. We also plan to close at least 115 less productive stores by 2022, largely stand-alone Carter's and OshKosh stores, many in declining outlet centers. About one third of those closures are planned to occur this year. Collectively, the stores are scheduled to close at less than a 2% operating margin last year. Those stores remain open at an operating margin of over 20%. As we close these stores, we are seeing about 20% of their sales transferred to our other stores located in an adjacent market. The profitability of those transferred sales flows through at a very high margin, given the fixed cost structure of our store model. Our objective with these openings and closures is to improve the productivity of our stores and to strengthen the consumer's experience with our brands. Our multi-brand customers are our most valuable customers. Our data shows that the number of our multi-brand customers grew over 20% this past year and their annual spend is two to three times that of our single brand customer. Consumers have raided our Carter stores as their favorite place to shop for zero to 24 month apparel. Over the past year 83% of our customers shop in our stores. In most cases our relationship with consumers starts in our stores and with our Age Up initiative we plan to extend the length of those relationships. Those customers who shop both online and in our stores now spend more than twice the annual amount of our online only customers. Growth in our U.S. e-commerce sales in the third quarter was less robust than we had seen in the first half. First half e-commerce comps were up in the mid teens. By comparison, comps grew by less than half that rate in the third quarter. In years past, we've been fortunate to have strong international demand for our brands. But as we've seen in recent years the stronger dollar has had an adverse effect on our international customers. Demand from domestic consumers in the quarter grew about 13$. Demand from international consumers was down about 10%. We saw the biggest declines in demand from Brazil, Argentina and Russia each of which saw double-digit devaluation in their currencies relative to the U.S. dollar in the third quarter. E-commerce sales in October have rebounded to double-digit growth, driven by higher domestic demand. International demand is still down to last year. We are forecasting 4% to 5% growth in our retail segment this year with comps up 2% to 3%. Our comp goal is 3% or better. And if current trends in our business continue, we believe that goal will be achieved. Going forward, we are expecting mid single digit growth in our retail segment. Our wholesale sales in the quarter were lower than last year, largely due to the loss of Toys “R” Us and Bon-Ton2, historically good customers of ours. For the year, we’re forecasting our wholesale sales down about 3%. What we lost in sales to Toys “R” Us and Bon-Ton, we have partially recapturing with other customers. As the largest supplier of young children's apparel to the largest retailers in the century, we have insight into how our brands are performing with every major retailer. Retailers who have a broader scope of baby related product offerings, including car seats, strollers, diapers and formula are benefiting most from the Toys “R” Us store closures. In our stores, we're seeing the best lift in sales at stores within a five mile radius of the closed Toys “R” Us stores. As more time passes since the Toys “R” Us store closures this summer, we're seeing an improved trend in our store sales. With respect to replenishment trends, earlier this year we launched our annual refresh of Little Baby Basics, as the core essentials component of our Carter's baby product offering. Today replenishment trends, exclusive of Toys “R” Us are better than last year, but the growth is less than we planned. What we have not seen this year in the growth of Little Baby Basics we are seeing in the growth of our exclusive brands sold collectively with Amazon, Target, and Wal-Mart, three retailers which we believe are benefiting most this year from the Toys “R” Us store closures. That's the beauty of our business. Our brands are sold in over 18,000 retail store locations and through every major online retailer of young children's apparel, no other company and young children's apparel has our extensive market presence. Wherever consumers are shopping for young children's apparel they will likely see a strong presentation of our brands. Store closures in our wholesale business have been disruptive to our growth plan this year. Longer term, we see these closures positively. Going forward, we will be serving fewer, better and larger retailers. We have the ability to invest in their businesses and our brands to provide a better experience for consumers. Going forward, we expect to see low single digit growth in our wholesale segment. We respect international sales to grow about 5% this year and contribute about 13% of our total sales. In the third quarter sales were lower than expected. Like our experience in the United States, unusually warm weather weighed on Carter's results. Cooler weather is now driving strong double-digit comps in the fourth quarter. To a lesser extent sales in Mexico and China were also below plan in the quarter. I was in Mexico earlier this month. The integration of that new business is going well. It has a first class management team and it's a good multichannel model. Its wholesale business is currently larger than its retail business. We’ll be testing a new co-branded model in Mexico next year. We hope to replicate the success we’ve seen with that store format in the United States and Canada. We also planned to launch e-commerce capabilities in Mexico next year. We are changing our business model in China. We had a disjointed effort managing the e-commerce business separately from the brick and mortar business. Carter's was directly managing the e-commerce business. Our wholesale partner was managing the stores and we were unintentionally competing against each other. China is a very attractive market for kid’s apparel, given four times the number of annual births relative to the United States. We are exploring a new model, which invite Envision a China based partner managing both the online and offline businesses under a licensing arrangement. Our objective is to build a stronger foundation for growth in China and to do so with a capital light and more profitable model. This was our approach to entering Canada and Mexico. Those are two very profitable businesses for us today. We're forecasting mid single digit growth in international sales this year that is currently our planning assumption for the growth in the years ahead. Some of the risks we're assessing going forward are rising product cost and the exposure to new tariffs. As we've shared with you on our last call, we are planning low single digit cost increases for spring 2019. After several years of consistently lower product cost driven in part by the success of our direct sourcing strategy, we are forecasting low single digit increases in product cost beginning in the fourth quarter this year. We've raised our spring 2019 prices to help mitigate the margin impact of those cost increases. Longer term, we are assuming a more inflationary cycle, with a low single digit increases in product cost and consumer prices. Just for context, every percentage point increase in our product costs at less than $0.04 to the unit cost. So even with the related price increases, we believe we will be offering significant value to consumers. Tariffs imposed earlier this year on imports from China are not expected to have a material impact on our 2018 or 2019 growth objectives. Our product categories were largely excluded from those tariffs. That said, this is a fluid situation and we will continue to monitor the imports and trade negotiations. In recent years, we've been reducing our exposure to China, given lower cost opportunities in other countries. Given the risk of additional tariffs on apparel, we plan to further reduce our exposure to China beginning next year. If additional tariffs are enacted, we will pursue additional price increases and reduce spending to help mitigate the impact of higher than planned cost increases. In terms of guidance, in July we were intentionally cautious forecasting growth in the third quarter. Consumer demand during seasonal transitions is difficult to forecast and in our business highly dependent on weather. Our forecast in July did not contemplate the unusually hot weather in the Northeast and other parts of the country in early September which is the largest month of sales for our company. The weather risk historically is lower in the fourth quarter. We have nine weeks to go this year. Given our experience in the third quarter, we have tempered our fourth quarter growth objectives and believe there may be more upside than downside in our forecasts. Currently demand for our fall and holiday product offerings is very good. We're currently outperforming our forecast, given what we believe is pent-up demand for cooler weather outfitting. In recent years, we've seen good growth in the fourth quarter. Historically as weather turns during seasonal changes each year, we have seen a surge in demand that's currently what we're seeing in our business. Carter's is the number one brand for baby apparel and sleepwear. We have five times the market share of our nearest competitors. Both product categories are purchased in higher quantities as weather turns cooler and during the year end holidays. We are also seeing a strong response to our holiday playwear, including the larger sizes added to our Carter's brand this year. Our Age Up Initiative is off to a strong start and provides a new source of growth for us in the years ahead. In summary, despite the challenges this past year, we are in the homestretch of what we expect will be a record year of sales and profitability in our 30th consecutive year of sales growth. We made significant investments in our business this year. We believe we have strengthened our multi-channel, multi-brand business model and are uniquely positioned to outperform the market and gain share. We own two of the best known and best performing brands in young children's apparel. To the best of our knowledge no other company in the world has our brand reach or success in young children's apparel. I want to thank all of our employees who are focused on delivering a strong finish to the year. I'm grateful for their commitment to strengthen our brands and to serve the needs of families with young children. Over the next few months we will refresh our growth plans based on our experiences this year. Based on our current estimates, we are planning good growth in sales and earnings next year. Richard, will now walk you through the presentation on our website.

Thank you, Mike. Good morning everyone. I'll begin on page 2 of today's presentation materials with our GAAP-basis income statement for the third quarter. Most of my comments today will speak to our results on an adjusted basis. This year's Q3 GAAP results included $3.5 million charge related to changes in our China business model. Last year's Q3 GAAP results included net charges of a $0.5 million, principally related to store restructuring costs and acquisitions. Note that our adjusted results exclude these charges in both periods. Our year-to-date GAAP P&L is included on page 3. Today's presentation and earnings release include reconciliations of our GAAP basis results to the adjusted basis of presentation. I encourage you to review this information as you evaluate our results. Turning to page 4 with some highlights of the third quarter. Consolidated net sales declined 2.5% compared to last year. The principal driver of this decrease was lower sales in our wholesale segment, offset by slight growth in our retail and international segment. Discontinued sale to Toys "R" Us, Bon-Ton and Sears weighed on our results this year, sales to these three customers in last year's third quarter were approximately $34 million. Fortunately, we did not have receivable or inventory exposure in connection with Sears recent bankruptcy filing. Adjusted operating income declined 18%, reflecting lower sales and investment spending. Adjusted earnings per share declined 5% compared to last year to a $1.61 with the benefits of a lower effective tax rate and lower share count, partially offsetting lower operating income. On our July call, we had guided to roughly comparable sales and earnings for the third quarter, relative to this forecast retail sales around the key Labor Day selling period and to a lesser extent replenishment demand and wholesale were lower than we had planned. The decline in profitability versus the forecast tracks to the lower sales, particularly in retail and we had higher fulfillment expenses and inventory related costs. Moving to our adjusted P&L for the third quarter on page 5, beginning with adjusted gross margin. Adjusted gross margin was 42.2%, down 40 basis points compared to last year. This reflects customer mix changes within wholesale and higher freight and shipping costs in our e-commerce business, offset somewhat by sourcing efficiencies. Royalty income was roughly comparable year-over-year. Our adjusted SG&A rate was 31.7% compared to 29.9% in the third quarter of last year. As we've articulated on previous calls, we've had a strong investment agenda, particularly in support of our retail businesses over the past few years. We've invested in new stores, marketing, distribution capacity, e-commerce delivery speed and omni channel and retail technology capabilities, as well as investments in company infrastructure to support our growing and diverse enterprise. We have not yet seen the full benefit of all of these investments, but believe they will help drive our business in the quarters and years ahead to enable greater productivity and capabilities across the company. We have a good process to evaluate the efficiency of our spending and will continue to critically evaluate which areas merit continued investment. In the third quarter, we've estimated that approximately $16 million of SG&A related to the investments in the areas previously mentioned and as much as $50 million on a year-to-date basis. Third quarter net interest and other expense was $10 million compared to $7 million last year. Interest expense in the third quarter was about $2 million higher than last year, due to higher borrowings and higher market interest rates versus a year ago. Our third quarter effective tax rate declined to 23.5% from 33.2% a year ago, reflecting the benefit of U.S. Tax Reform Legislation passed at the end of last year. Our average share count declined to 3% compared to last year, driven by our share repurchase activity. So again, on the bottom line third quarter adjusted EPS was $1.61, down about 5% from a $1.78 last year. Page 6, summarizes our year-to-date adjusted results. Through the first three quarters of 2018, net sales were comparable and adjusted EPS grew 1% over last year. Turning to page 7, with a summary of our balance sheet and cash flow. We ended the quarter with strong liquidity with cash on hand and available borrowing capacity on our revolver totaling approximately $470 million. With the benefit of the new US tax law, we were able to repatriate $65 million in overseas cash during the quarter. Net inventories at the end of the third quarter were up 14% versus last year. As expected, inventories were higher for several reasons, including new growth initiatives across the business, the timing of inventory receipts and higher on hand baby replenishment inventory. At present, we believe the overall quality of our inventory is good with net inventories currently up high single digits over a year ago. So already a nice decrease from our quarter end position. We anticipate good sales growth in the fourth quarter and early next year and project year end net inventory growth at the end of this year to moderate to approximately plus 8%. We've determined to carry higher inventory in a few specific areas of the business, notably certain programs within retail and in support of our exclusive brand businesses, which have been performing strongly. Operating cash flow in the first three quarters of 2018 was $21 million compared to $118 million last year, reflecting lower earnings and the higher inventory position at quarter end. Historically, we've generated the majority of our annual operating and free cash flow in the fourth quarter of the year and we expect that will be the case this year as well. We're currently projecting that full year operating cash flow will be in the range of $300 million to $325 million. Our outlook for capital expenditures has moderated a bit and we're now projecting to spend approximately $75 million this year. We continue to execute against our return of capital agenda. Through the first three quarters, we have returned a total of $209 million to shareholders comprised of $145 million in share repurchases and $63 million in dividends. Now turning to page 9 with an overview of our business segment performance in the third quarter. Our consolidated adjusted operating margin was 11.6% compared to 13.8% in last year's third quarter. The drivers of this decrease were lower profitability in our U.S. retail and wholesale businesses, which I’ll cover in some more detail. Adjusted business segment results for the first three quarters of 2018 have been provided for your reference on page 10. Moving to third quarter results for US retail on page 11. Total US retail segment sales in the third quarter increased 1% versus last year. Our total retail comp was up 0.5%. As Mike mentioned, results in US retail were lower than we had forecasted, which we've attributed to several factors. First, our performance around the Labor Day holiday period was below our forecasts. A year ago, we enjoyed a market cold snap around Labor Day which we believe helps drive strong early September performance. Temperatures around the country were obviously much warmer this year. Our promotional messaging did not resonate with consumers during the Labor Day period. So we've adjusted our marketing to more effectively connect with our customers. E-commerce sales were lower than we had anticipated. In addition to the Labor Day and promotional factors which I've mentioned we believe the stronger US dollar negatively affected traffic and sales from international consumers shopping on our US website. We've seen this phenomenon in the past when the US dollar strengthened against foreign currencies. After the Labor Day holiday period and with the arrival of cooler weather, US retail sales trends improved meaningfully, with comps in the double-digits over the last three weeks of September. Q4 is off to a good start, as October month to-date comps are up in the double-digits. As Mike said, we continue to make progress with our store portfolio optimization initiative. Our co-branded format continues to resonate strongly with consumers. We believe an important element of improving the productivity of our retail store portfolio over time will be the increasing balance of stores in the co-branded format. US retail segment margin was 10.3% compared to 12.8% in the third quarter of 2017. This performance reflects higher e-commerce shipping and fulfillment expenses and higher spending on marketing and technology investments. We’re expecting retail comps in the fourth quarter will be up about 4%, driven by a number of initiatives, including the contribution from our Age Up size expansion, additional marketing spend and a greater contribution from Skip Hop. On pages 12 to 14, we’ve included some of our holiday marketing. On pages 12 and 13, we highlight some of our special holiday outfitting items in this year's assortment. On page 14, consumers have told us for years that they’d love to be able to join their children and wearing our iconic Christmas pajamas. This year, we're letting mom and dad in on the fun by offering select adult pajama sizes online, which means the whole family can be in Carter’s jammies in this year's Christmas card photos. On page 15, we have our latest Carter’s Instagram posts. In the third quarter, Carter’s once again captured the greatest social media engagement among our peers on Instagram by securing all of the top 25 engagement scores. Turning to page 16 with results for our wholesale business in the third quarter. Sales in US wholesale were down about 8% versus a year ago. We had planned third quarter wholesale down year-over-year. This decline was largely driven by discontinued shipments to Toys "R" Us and Bon-Ton, calendar differences between us and several of our wholesale customers many of which have a 53rd week in their calendars this year, also contributed to some shipments falling into the fourth quarter this year. Relative to our previous forecast replenishment trend in Q3 was somewhat lower than we had planned. We saw good growth in replenishment demand across wholesale, just not quite the level we had planned. Replenishment demand has been particularly strong for our exclusive brands. We're expecting strong net sales growth in US also in the fourth quarter, up in the mid single digits over 2017. Segment operating profit was $68 million compared to $79 million last year. Segment margin was 20% versus 21.3 a year ago. This margin performance reflects changes in customer mix, higher spending on marketing and higher provisions for bad debts and inventory. For the full year in 2018 despite the negative impact of the discontinued sales and some higher provisions for uncollectable accounts, we're forecasting the operating margin for US wholesale to be approximately 20%. We believe we will recapture about half of the $80 million of sales to Toys "R" Us and Bon-Ton, we had originally planned for Q2 through Q4. We're particularly pleased with demand for Skip Hop in the wholesale channel. Skip Hop has largely recaptured all of its lost Toys "R" Us sales with increased demand from our other wholesale customers. Now moving to our US retail business. Selling in the wholesale channel so far in the fourth quarter has been very strong. Page 17 features a photo of a new baby shop at a Coles store in the Atlanta area. We've partnered with Coles to support the recent roll out of 150 new Carter's baby shops. Locations were selected based on proximity to closed Babies "R"Us locations. We believe delivering a high quality brand presentation wherever mom shops is a point of differentiation for us. In these baby shops we updated pictures optimized for space and capacity, while providing a modern fresh look with our great Carter’s photography. Early returns on these investments are encouraging. Page 18 features our child of mine brand, which is available exclusively at Wal-Mart. Wal-Mart recently strengthen the in-store presentation of the child of mine brand, which can be found in virtually all of Wal-Mart's 4000 store locations in the United States. We believe Wal-Mart is seeing strong returns on these investments to better showcase this exclusive brand in their stores. On page 19, we have some imagery from target.com featuring the just one you brand, which we created especially for Target, like many of our wholesale customers, e-commerce is an area of investment and emphasis for Target. We think this online presentation does a great job conveying the style and value of the just one you assortment. On page 20 simple joys continues to be an important growth initiative for us. This brand was introduced on Amazon last year and has been growing rapidly. We recently introduced simple joys toddler product, which complements our initial launch which was focused on baby and sleepwear. Simple joys growth continues to ramp up and we've seen a notable increase in demand recently since Amazon made this brand available to all of its customers. Up to this point simple joys was an exclusive bartering only for Amazon Prime customers. On page 21 we've included photos of two notable wholesale, points of distribution for our Skip Hop brand. First, Amazon recently opened its first four star concept in New York City. As the name implies the store features items that customers have rated on average four stars and above. Included in the launch of the stores are focused assortment of Skip Hop products. Second, we've expanded Skip Hop's presence at Macy's by introducing a new fixture in 45 locations and adding a second fixture in nearly 70 existing locations. This expanded presence builds on the brand's successful introduction in Macy's in 2017. Moving to page 22 and international segment results for the third quarter. International segment net sales grew 1% in the third quarter, reflecting the contribution from our 2017 Mexico acquisition and increased demand in various markets outside of North America. This growth was mostly offset by lower demand in China and unfavorable movements in foreign currency exchange rates. On a constant currency basis, third quarter international segment net sales grew 4%. Through the first three quarters of 2018 our International segment has achieved growth of 6% over last year. Canada, the largest component of our international business grew net sales 3% on a local currency basis with retail comps of plus 3% as well. Similar to our experience in the US, we believe warm weather weighed on Canada's results in the third quarter. Canada's retail business is off to a strong start in Q4 with comps currently up well into the double-digits, as cooler weather is driving higher demand for fall product offerings. Q3 sales in the Mexican market, which includes the business of our former licensee which was acquired last year were $17 million, up nearly 30%. As Mike said, our team in Mexico is making good progress in building out its multi-channel business in this attractive market. International segment adjusted operating income was $16 million compared to $17 million in the third quarter of last year. Segment operating margin was 12.7% compared to 13.5% last year. This margin performance reflects those [ph] in markets such as India, the United Kingdom, Russia, Greece and Ukraine to name a few. Pages 23 and 24 showcase some of the newest stores operated by our international partners. These 25 or so partners operate stores in over 80 markets worldwide. Page 23 features a Carter store at the Mall of the Emirates in Dubai. This new upsized location strengthens what has historically been one of the most productive Carter stores in the world. Page 24 is a photo of a newco branded store in Perth, Australia. This is our partner’s first store on the west coast of Australia and the stores after a very strong start. Moving to our outlook for the fourth quarter on page 26. We're expecting a good fourth quarter with growth in all of our business segments. We've moderated our expectations somewhat relative to our previous forecast, principally to reflect a more cautious outlook on retail comps and wholesale replenishment demand. We're assuming Q4 retail comps will be up about 4%. As we've said the fourth quarter is off to a strong start, and if current trends continue we may have some upside to our forecast. For the fourth quarter we expect consolidated net sales to increase approximately 5% and adjusted earnings per share to increase approximately 10%. We expect year-over-year growth in SG&A will be lower in the fourth quarter than year-to-date. And we're planning SG&A leverage for the fourth quarter as well. If we're successful with our fourth quarter plans, we would end the year with sales growth of approximately 1.5% and adjusted EPS growth of about 5%. Risks that we're watching closely include the level of promotional activity in the marketplace. International consumer traffic and demand in our U.S. retail businesses and the status of trade negotiations between the United States and China. With these remarks we’re added to your questions.

Thank you, sir. [Operator Instructions] Our first question comes from Kate McShane from Citi.

Hi. Thank you. Good morning. Thanks for taking my question.

Good morning.

I was wondering if we could walk through the Toys "R" Us recapture, again, originally you had told us you would achieve $20 million out of the $40 million when you last spoke to us in July. Can you update us on what you think you captured during the third quarter? And then just still on the same subject, could you maybe walk us through what the environment has been like towards Toys "R" Us, and when you start to see sales improve, was there a pull forward of demand from the liquidation that's causing some of the overhang. And does your 2019 outlook include any additional recapture you expect to see?

So your recollection is correct. We were about $20 million of the $80 million we - just put in context, we lost probably about $80 million of balance of year shipments that we had planned to make after we heard that Toys "R" Us and Bon-Ton plan to close all of their stores. So through July – and we assumed we recaptured about half of that, about $40 million of the $80 million and through July we probably have felt as though we had at least a line of sight on $20 million of additional demand largely from wholesale. The mix was going to be largely driven by additional wholesale demand. So we had a line of sight to about $20 million of that. Through today we probably picked up an additional $10 million or so, I'm rounding here about $30 million. Then in the balance of the year, we're - you know we've got two very significant months ahead of us. We expect to have the balance of the $40 million. So the analysis I've seen which suggest that we’ll recover more than $40 million. We had hoped that that would be a bigger number, but at least what we had shared in our in our forecast with you was that we felt as though we had a high confidence level that we would recapture $40 million of the $80 million that we had planned to ship to those two customers. And then in terms of the business, I would say we were very disappointed in the Labor Day performance. Labor Day for us is an important holiday. It's probably second only to the Black Friday holiday, and so we were very disappointed in the performance. Rest assured, with the other comps during our Labor Day promotion were down about 20%, if you exclude the performance over that Labor Day holiday promotion, I think our comps were up - probably going to be up some portion about 4% to 5% for the quarter, was that impactful. In the weeks that followed Labor Day, our comps were up around 13%. So we saw the consumer starting to embrace the fall and holiday collections much more so than they did over the Labor Day holiday. And in October performance has been outstanding. And this is what we've seen in our business over the years. When the weather turns, when it turns from warm to cold and then in the spring from cold to warm, we see a surge in demand for our product offerings and that's what we've seen in recent weeks. So business has been very, very good. That said, we've got nine very large leaps ahead of us. We don't want to assume what we've seen in recent weeks is going to continue through the balance of the year. So even we're - we realized that we came up short with our third quarter, we're determined not to do that in the fourth quarter. So we've tempered the forecast to a level where we have a high confidence level in these forecasts.

Okay. Great. And if I could just ask one more follow up question about your Labor Day comment, in the prepared remarks, I think you had mentioned that you pivoted the marketing message a little bit. I just wondered why do you think - what do you think it was up in messaging that wasn’t really conveying your value proposition, especially because the brand is already known as having good value. Were the competitors just more competitive than usual around this time period?

Well, that we can say [ph] always competitive. I think in retrospect, I think our marketing message was too heavily weighted to the promotion and not to the strength of the product offering. So those are some of the changes that we made after what we saw over Labor Day. And the consumer responded to it.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from Ike Boruchow with Wells Fargo.

Hey. Good morning, everyone. Two questions, I guess, maybe Richard, the first question is just looking at the Q4 outlook you have now relative to couple of months ago, you know, kind of understanding the sales are a little bit below, but given you're expecting some SG&A leverage, it seems like the gross margin pressure maybe is more meaningful than you thought. Could you maybe walk us through your thoughts on gross margin for Q4 and then kind of tying that to the inventory ending Q3 are you a little bit heavy and you're implying some more promotion and markdown that’s going to be needed relative to your last outlook? Just kind of curious on a on holiday margin.

Okay. Well, I think there are a few points of pressure year-over-year as it relates to gross margin. They're largely the trends that we've seen today in the business, more than anything. So in wholesale, you have the change in customer mix, the loss of the TRU and Bon-Ton volume, which was very high margin for us. The growth is coming from some of the lower margin businesses and wholesale. They are good growing businesses, they are just not quite at the same margin of what we lost with Toys "R" Us and Bon-Ton. Within retail there probably is some minor effect of some inventory clearance, although we've made very good progress with that. And by the time we got to the end of the quarter we had moved through quite a number of units. That's probably less of an issue. One issue that we have faced in the gross margin structure within e-commerce has just been some higher shipping costs and fulfillment costs. That business has been a bit more variable. So we haven't had quite the same distribution efficiencies that we've enjoyed in our Braselton, D.C. I think the slowdown in demand from international consumers that tend to buy more units per transaction has affected some of those efficiencies as well. And we are investing in expedited shipping as well to make sure that the orders get to consumers on a more rapid pace than they did a year ago. I'd say the upside to margin year-over-year we're expecting better margins in Canada. We're seeing a nice lift in margins in Skip Hop and we're driving some other efficiencies in our supply chain, all of which are coming through - coming to the gross margin rate.

And Richard can you say with more detail on what your expectations are for Q4 on the gross margin line?

Well, I would say we'll continue to enjoy that nice serial left that we got going from Q3 to Q4 where we have a higher proportion of retail sales relative to the third quarter. I do expect some modest pressure year-over-year in the margin rate.

Got it. And then just last question, you know, you've given us some breadcrumbs to next year on the topline on US wholesale, low single digits and good growth international and your comps are obviously better quarter-to-date. I guess I'm just curious you know, the margins there's different things that are kind of taking place, you know, direct sourcing got a long way, product costs are now inflationary. I guess just thinking about the algorithm of the business and to next year are you guys - how do you balance growth or I guess said differently, are you able to view the business as having the same type of growth that it had in prior years?

Well, we'll know more. We have a lot of work to do between now and the balance of the year. We were developing our revised long-term plans through 2023 and we'll review that - those assumptions with our board and the balance of the year and early next year. We'll have more to share with you in February. But our plan is continue to have growth and both in sales and profitability. We're disappointed we’ll come out this year in terms of our operating margin. We felt as though we would have done better. But to Richard's point we lost a very high margin customer in Toys "R" Us this past year and we took a step back. And our retail business in the third quarter, those are probably two big misses relative to the growth that we envision possible this year. But our plan going forward is that we’ll have good topline growth and we’ll have a good margin expansion going forward. So we'll have more to share with you. It's premature to be more specific today on the growth and for ‘19 through 2223.

Great. Thanks, Mike.

Thank you.

Thank you. Our next question comes from Susan Anderson with B. Riley FBR.

Hi. Good morning thanks for taking my question. I guess I wanted to ask about the miss in third quarter. I guess, how much do you think was weather-related versus maybe some other factors such as pull-forward of demand from Toys "R" Us? And then just a follow-up on Ike's question on the fourth quarter guide. I guess, I'm trying to figure out what's changed from your original expectation for fourth quarter, because it seems like maybe top line is a little bit better. So on the margin front, that's come down a bit. But it seems like the loss of - like the Bon-Ton business or Toys "R" Us was known. So maybe if you could just, kind of, talk about what's changed within that margin outlook? That would be great. Thanks.

As it relates to fourth quarter, our implied guidance for fourth quarter topline would have been growth closer to 6% or 7%. We've moderated that to be the roughly 5% that we talked about today. And I think there is a healthy dose of just being cautious with that. We've seen the shortfall from Labor Day which is a big volume period. As Mike said these coming weeks are very high for us, business is very, very strong at the moment, but we're being a bit more cautious in our outlook. On the margin front, I don't know that there's a dramatic change in our outlook there. I think most of the change in profit outlook attracts to lower topline where we're taking most of that out of the retail business which is good margin business for us. I think we are cautious on the factors I mentioned related to shipping margins and shipping costs, we are seeing some higher labor costs they, we're seeing the investment in expedited shipping which is weighing a bit on margins.

You know, the question is how much weather played a role in the third quarter, Labor Day it did, we happen to be in New York the days after Labor Day, it was unusually high. And keep in mind, Labor Day weekend, we're selling blanket sleepers, we're more pull forward. So it's understandable the weather would have had an impact. But we look for things other than - other than weather, again, in retrospect we felt as though the marketing message missed the mark. Other things that worked against us, the e-commerce demand was not what we had expected in the third quarter. It was less than half the rate of growth that we've seen in the first half, and it was lower international demand. We had good growth in domestic demand. Good, good double-digit growth in domestic demand, but international demand was lower. And I'd say we've referenced the replenishment trends in our core Carter’s Little Baby Basics. The replenishment trends are up, year-over-year they are up excluding the impact of Toys "R" Us. With the other customers, we've seen good replenishment trends just not as good as we had had hoped for. And further away we get from the timing of those Toys "R" Us store closures, the better the trend in the sales have been, both in replenishment and in our own store sale. So there's no question. There was a pull forward of demand with those Toys "R" Us store closures, people were loading up basketfuls of product, and so that product is - children are outgrowing their product, we're starting to see better trends in our sales.

Okay. That's helpful. And then just one follow-up. Maybe if you could talk about. If you see sales pressure both across baby and then young kids, I think you talked about the size-up initiative doing pretty well. But maybe there's a little bit heavy inventory in the baby category. And with that, I guess, do you feel like you've lost any?

The Wal-Mart’s, Amazon did well, so our business is very good there. We have good baby business in other accounts, just didn't elevate them enough to offset the TRU situation. So we continue to watch that. Births are down, so that put that - does put pressure on the baby business. But our goal is to overcome that. So we continue to focus on that business and make sure we double down our efforts on our direct channel and with our wholesale customers to continue to drive growth in the core of our company. I think we showed you know, the Kohl's presentation we've had. We've invested in digital marketing with many customers and we continue to press many efforts to continue to grow our baby business and we're very serious about that and we think that we'll be successful at that. In terms of Age Up, we feel good about that initiative. July we launched that Carter’s Kid Line as a way to extend their relationship with the customer. It was kind of the second phase of the With You From The Start campaign. And both the product launch and the marketing was well-received by our customers. In Q3 sales in that 5 to 10 year old segment of our retail business grew by about $10 million and most of it came from the bigger sizes. So that strategy does represent a significant opportunity for our company. We added that one size, size date [ph] a few years ago, if you recall and we're now garnering about $80 million in sales from that initiative. So and adding a few sizes, age 10 to 14, we can fully address that 5 to 10 year old market and each share point of that is an opportunity of over $100 million for the company. So we're going to continue to focus on baby and grow that business and we feel good about our share, but we’re going to continue to make sure we strengthen that and that we've got this incremental opportunity with Age Up which we feel good about as well.

Great. That's helpful. Thanks so much. Good luck nice quarter.

Thank you.

Thank you. Your next question comes from Heather Balsky with Bank of America.

Hi, good morning. Thank you for taking my question.

Good morning, Heather.

Morning. So a key competitor has expressed a willingness to promote pretty aggressively to drive share. How is the promotional environment quarter-to-date? And how do you think about your ability to pass through price next year if the environment does get more promotional?

Sure. I’d say that it continues to be promotional. I can't recall a time when it wasn't promotional, but I would say every good retailer is focused on inventory management, buying fewer units, trying to improve price realization, improve sell-through, sell less at the end of the season on the clearance rack. By and large we're seeing a number of our customers having good better margins year-over-year with our brands. So it will continue to be noisy in terms of the messaging. But every good retailer we know is trying to get - improve the profitability of their sales. So going forward, we're looking at what I would characterize as modest price increases and like-for-like product, modest price increases and as a shared with you just for context, every percentage point of cost increase for us represents less than $0.04 in the unit cost. So it's - substantially everything we do our average price points are less than $10. So with the normal inflationary cost increases we think that that will not be an issue passing those along to the consumer, even as we looked at the exposure to the tariffs for some reason that all of the imports from China are subject to that 25% tariff. I would say that that challenge would be comparable to what we saw during the cotton crisis back in 2011 and during the cotton crisis we improved our pricing about - by about $0.50 a unit and we had very good topline growth that year and did a good job recovering from that spike in cotton prices. So I think we have a handle on what's possible with the price increases. Our focus has continued to be to strengthen the product offering.

Our brands are known for quality and great value. We will be competitive. But cotton prices were up, oil prices were up, transportation prices are up. And so all of that we've taken into consideration in terms of what makes sense for us to continue to try to improve our margins. So that's our game plan for spring ‘19.

Thank you. And with the Toys "R" Us, because they, I guess no longer - I guess in the back window and the growth coming from some of your lower margin wholesale partners. How do you think about your gross margin opportunities going forward? Are there offsets to that mix shift?

Just to be clear. The reasons why Toys "R" Us was a very high margin customer for us, by large that was a baby business, and baby is one of the richest-margin product categories we have. So the other customers have a larger selection of the playwear, broader range of size ranges. So as you go up the – the bigger child, the more the fabric, the bigger garment, it doesn’t have the rich margin structures of the baby product offering. We have good margins with the other customers. And so there is a number of margin driving initiatives around inventory management. We’re scaling up our new businesses with Skip Hop, Amazon. In Mexico we have a more profitable model in China going forward. Our sourcing team is doing great job exploring new markets to source our products going forward. And pricings lever, its not the biggest lever, but as we see some of these inflationary pressures, we plan to take the prices up modestly.

Okay. Thank you.

You’re welcome.

Thank you. Our next question comes from Laurent Vasilescu from Macquarie Group.

Morning. And thank you for taking my questions. I wanted to follow up on China with regards to $3.5 million charge. Can you dive into a little bit – into that - the effects of the P&L with regard to revenues gross margin in SG&A. Can we anticipate any other charges over the next few quarters? And then lastly, I forget if you called it out, but can you maybe parse out how much sourcing comes out of China and what that percentage rate can go down to if tariffs come into play?

Sure. Let me let me comment on China, and then Rich will address the - your other question with respect to China. So our - we source less than 30% of our total units today from China. And n China has been a great place to source the product. The execution when we look at the things that drive our decision in terms of where we source from, it's about safety, quality, reliability. You can go to some parts of the world for a lower cost, but it never shows up, doesn't do much good, and the last component is cost. So against those four things that we look for, China has been an exceptionally good place to do business. That said, you know, we're - we have this exposure to tariffs, thankfully we've been working with our suppliers over the past year, many of which, not only are based in China, but they're based in Cambodia and Vietnam, Bangladesh, Indonesia. So they're helping us explore the possibility of shifting production from China if necessary to other parts of the world where they produce products. So we have the flexibility to move. That's the beauty of doing business in Asia over the past 20 years. We've developed these deep relationships with great suppliers that can handle the unit volume for our company. And we've been working with them this past year to explore other places if need be to source our product.

And on the on the China charge it was roughly $3.5 million, $2.5 million was recorded in gross margin that relates to additional inventory provisions that we took. The inventory for this market is unique to China. It's labeled for that market, market specifically, so we don't see a lot of opportunities to take it elsewhere in the world. And then about $1 million or so related to employee severance, as we're thinking about this new business model we don't think that we're going to have the same staffing requirements that we've had with our own employees in China. So a couple - a couple of million related to inventory provisions and a $1 million related to severance. I do think it's possible that over the next couple of quarters we could have some additional cost. I wouldn't envision those would be material to the company.

Okay. Very helpful. Thank you. And then in terms of the inventory growth of 14%, I think it's called out in one of the slides that there was a timing shift of receipt. Could you quantify that number? And then what what's the anticipated inventory growth rate for the end of the fourth quarter?

At the end of the year, I think we said we hope that inventories will be up 7% or 8% by year end. We're making good progress toward that. The inventories was sort of front end loaded to be at that 14% end of Q3. I would say there are few specific programs in retail where they've chosen to bring in some programs early. And then as I said our exclusive brands businesses at Target at Wal-Mart and Amazon all are performing really well. So we're taking up some additional inventory there. If the year end number is up 7% or 8%, the factors that I've mentioned are probably a few percentage points of that growth.

Okay. Very helpful. And then maybe if I could squeeze one last question. In terms of the double-digit comps quarter-to-date, and then comparing that to the guidance of 4% for the fourth quarter? Can you maybe possibly remind us what the monthly cadence was high level for last year's fourth quarter?

The last year fourth quarter October we had 1.6 [ph], November was about 5.5 and December was about 5.5 as well. We finished up at 4.5 for the quarter.

Okay. Very helpful Thanks very much. And best of luck.

Thanks very much.

Thank you. Our next question comes from Jim Chartier from Monness, Crespi & Hardt.

Good morning. Thanks for taking my questions. I just wanted to understand the - you know, the potential impact of the lower international sale, so a couple of years ago you had a similar dynamic. So what percentage of your direct to consumer sales today come from overseas and how does that compare to 2015, 2016 the last time we saw this impact?

So you’re talking about international sales. So – go ahead…

So in international through year direct to consumer business?

Oh, geez when we launched it years ago e-commerce - the international sales…

So 2015, 2016, yeah, we saw a similar, much more dramatic change in exchange rates and you guys broke it out for us on the call. And I was just curious you know what your exposure in your direct to consumer business is to international spending?

At least, on – e-commerce its around – its a little around 25%. That's the exposure, it was much higher years ago. But it has as demand - domestic demand is growing faster than the international demand, so it's around 25%.

And in the quarter Jim, it has been about 25% year-to-date in the quarter where international is down outline about 10%. It represented about 21% of our - of our business in Q3.

Okay. And then I believe again back in ’15. ’16, you saw an impact in some of your higher volume outlet stores or tourist destinations. Are those stores still open and are you seeing any impact in those stores as well?

Yeah, a little bit.

Yeah, we are.

Okay. And then I am not sure I miss this…

With the announcement I saw, I think, the Florida stores are contemporary to large international customers. I think year-to-date, I think the performance was generally in line with the chain. It wasn't meaningfully different.

Okay. And then on – okay, sorry. And then on China, I'm not sure if you said this, but what is China tracking to in terms of a loss for 2018?

Of $7 million.

And when do you expect to kind of finalize the new agreement and business model for China?

We hope to finalize it in the balance for the year. We hope early next year we've got a new model in place.

Okay. Thanks. And best of luck.

All right, Jim. Thanks very much.

Thank you. Our next question comes from Jay Sole with UBS.

Great. Thank you. You know, Mike I wanted to follow up on the - some of the outlet discussion there. Can you maybe help us understand why the performance of the outlet stores you called as weaker has been so much different from your other stores? What is that’s unique about your business that’s created that trend. Because you know, probably it doesn't seem like the performance in outlets you know, just overall retail has been that different from malls and other retail centers?

Well, in terms of our experience, the outlets have underperformed the chain and I think the last analysis I saw, I think in some cases we might be in some portion of 160 or so, so outlets tending to brand. And just the rule of thumb years ago, there's probably a 120, 125 really good outlet centers, Orlando, Sawgrass Mills, Dolphin Mall, those are exceptionally good outlet stores for us. But you know, relative to that that, really good centers were in considerably more of them. And these have been historically good profitable stores for us. But with the success that we’ve had with our own co-branded stores opening those stores closer to the consumer and the end the success of our e-commerce business, there's fewer reasons to drive 40, 45 minutes to a remotely located outlet center. And we're closing these outlet centers as they come up for lease renewal. So we have to make a decision do we reinvested, do we freshen it up to put a whole new look to it and we increasingly we're concluding we don't need to. And in years past when we would decide to exit the property owner would make it very attractive for us to stay by significantly lowering the rents. But we're looking at where the arrows pointing, for these declining outlet centers I think it doesn't make sense to renew those leases, we're better off putting our energy into co-branded stores closer to the consumer. It's a much better experience and that's what the results tell us. The consumer loves the co-branded stores, loves the convenience of shopping these two brands in one convenient location. And so as these - the outlet center, a number of these outlets stores come up for renewal we will be closing them.

Got it. Okay. That’s super interesting. And maybe Richard if we can follow up on the retail segment adjusted operating margin in this quarter. I think you called out e-commerce fulfillment expenses, spending on marketing and technology, is that possible to parse out, like what the bigger impact was to the margin of those three drivers? And sort of, what brought that on in this quarter? Because I think the margins you know, the last few quarters have been pretty much similar on a year-over-year basis?

Well, I don't know, that I'll parse them out in precise detail. I think those are the factors that affected the retail margin in the quarter, as shipping costs, we are spending more on marketing that includes the new brand marketing campaign a portion of that gets allocated to the retail segment and this fulfillment expenses that I mentioned were higher. I do think some of the variability in e-commerce is the source of some of the inefficiency that drove those costs higher. And we are testing this additional spending on expedited shipments for e-commerce orders, so all of which are weighing on the margins at this point.

Okay. Got it. Thank you so much.

You’re welcome. Thank you.

Thank you. That concludes our time for the call. I’ll now like to turn the call back over to Mr. Casey for closing remarks.

Okay, thank you. Thank you all for joining us on the call this morning. Appreciate your thoughtful questions and your interest in our business. We look forward updating you again on our progress in February. Good-bye.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.