Q2 2020 Carter's, Inc. Earnings Call
Ladies and gentlemen, welcome to Carters second quarter 2020, <unk> earnings Conference call.
Called today are Mr., Michael Casey, Chairman, and Chief Executive Officer, Mr., Richard Westenberger, Executive Vice President and Chief Financial Officer, Mr., Brian Lynch, President and Mr., Sean MCU, Vice President Treasurer.
After todays prepared remarks, we will take questions as time allows Carter's issued its second quarter 2020 earnings press release earlier. This morning, a copy of the release and presentation materials for today's call I've been posted on the Investor Relations section of the company's website at <unk> or dots corridors dot com.
Before we begin let me remind you that statements made on this conference call and the company's presentation materials about the Companys outlook plans and future performance or 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 and quarterly reports 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.
These non-GAAP financial measurements to the GAAP financial measurements is provided in the Companys 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 begin 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 like this.
Share some thoughts on our business with you.
Our performance in the second quarter was meaningfully better than we expected as you may recall for the safety of consumers and our employees. We closed our stores in mid March and they remained closed for nearly 80% of the second quarter.
Historically, our stores have provided the largest source of revenue to our business and from a market perspective in the United States nearly 80% of children's apparel was purchased in stores last year only 20% of children's apparel was bought on line.
Thankfully following our store closures in March we saw a surge in online demand for our brands. We also saw significant demand for our exclusive brands with target Wal Mart and Amazon and other essential retailers that we're able to remain open.
In the second quarter, we improved our marketing strategy, which enabled better price realization and a higher gross profit margin.
We reduced spending in inventories below prior year levels and significantly improved liquidity with a highly successful bond offering the day after our previous update with you in may.
So the pandemic has weighed on the growth we had planned this year the impact to date has been far less than we expected.
In terms of business trends, we saw the largest drop in sales and earnings in April.
Turn to profitability in May with sales about 80% of last year.
In June our consolidated sales improved to about 90% of prior year sales in sales trends in July our consistent with June about 90% of last year.
By the end of June over 90% of our stores in the United States and Canada together with most of our wholesale customer stores had reopened.
Assuming no meaningful disruption from the recent spike in confirmed cases of the Corona virus, we expect sales and earnings in the balance the year will gradually continue to improve relative to our second quarter performance.
That said our sales and earnings in the second half are not currently expected to achieve prior year levels, we'll share our thoughts on that outlook with you. This morning.
From a product perspective in the second quarter online demand was robust across our baby sleepwear and playwear product offerings products for always ranges from a newborn to a 10 year old child did well online.
We saw the strongest demand for our sleep or product offerings with children staying home from school and distance learning.
Get Pops home and playing time product offerings also sold well in the quarter with families spending more time at home together.
We delayed the launch of our little baby basics product offering typically timed for me until late June to support store Reopenings. This is the core of our baby product offerings in the best selling newborn apparel in the United States that refreshed product offerings is off to that start.
And our play where product offerings casual dressing far outperformed fancier outfits thankfully very high percentage of our product offering is focused on casual dressing.
We also saw good demand for our fourth of July product offerings consumers are clearly looking for reasons to celebrate that summer holiday.
Not surprisingly back to school outfitting is off to a very slow start due to the delay in school reopenings.
We stores closed for most of the quarter, we had a digital first mindset, which we believe that made it easier for consumers to shop with us through our web sites, we highlighted tops bottoms and accessories designed to be purchased together are made to match product offerings drove a disproportionately higher rate to say.
Sales and profitability.
We also previewed beautifully designed face masks for children, we marketed the face masks as a preorder opportunity to our best customers in nearly sold out within the first week face masks will continue to be a component of our product offerings for the foreseeable future.
Since our last update our merchandising design the in sourcing teams have completed our spring 2021 product offerings, which will launch in the fourth quarter. This year.
Given travel restrictions our sales team had its first virtual sell in meeting with our wholesale customers using digital product images.
Our wholesale customers and retail teams responded very positively to this new product offering.
Fair enough the forecast for spring 21 later this year.
Actually given a more favorable environment for input costs in excess manufacturing capacity in the Asia, we're forecasting lower product costs for spring 2021.
The first week of men, we began to reopen all of our stores in the United States. Our retail team did an excellent job preparing our stores for resumed operations, including bringing over 13000 of our co workers back to work.
So traffic to our stores has not yet returned to pre covis levels, those who were visiting our stores came to buy we saw significant increase in conversion rates units purchased per transaction and price realization driven by fewer and better promotions.
Our marketing at retail teams focused on the benefits of enrolling in our rewarding moments in credit card programs.
At the same time, they thoughtfully walk back less effective promotions, which enabled better margins on our second quarter sales.
We substantially all of our stores now open we're seeing a meaningful difference between our stores located in tourist locations in or other stores sales in our stores historically driven by tourists and international guests were down over 20% after reopening.
By comparison in the post opening period non tourist store locations comped up 15% in the quarter.
Last year, our tourist stores represented about 10% of the store chain and contributed nearly 20% of our store sales.
Given the resurgence of the Corona virus, especially in Florida, Texas, and California, We expect demand from international guests and tourists, we'll continue to be under pressure through the balance of this year.
[noise] thankfully more than half of the lost sales in the second quarter two of the store closures was offset by a significant increase in E. Commerce sales in the second quarter, we saw a triple digit growth in online demand for our brands in eight of the 13 week period.
Profitability on E commerce sales more than tripled in the second quarter with fewer promotions needed given the strong online demand for our brands and a good inventory position.
Historically international demand on our US web sites had been robust. These international guests are big ticket buyers purchasing our high margin baby apparel.
Online demand from domestic consumers increased over 120% in the quarter.
By comparison online demand from international guests dropped 4% and contributed only 11% of total online sales in the quarter compared to 22% last year.
The biggest decreases came from guests in Brazil, and Argentina, two of our largest international markets, which have been significantly affected by the corona virus and currency devaluation.
In recent years, we've invested in technology that enables our stores to fulfill online purchases increasingly consumers prefer to pick up their online purchases in our stores. Many are now choosing our same day pickup service.
As our stores reopened we saw store fulfillment of our online purchases increased from 20% to 30% of our ecommerce transactions.
The largest increase in our omni channel sales came from shipping online purchases from our stores to the customers at home.
Is relatively new capabilities provide a better experience for consumers and our margin accretive relative to shipping from our distribution center to their homes.
By the end of August we expect over 70% of our stores will be able to fulfill E commerce orders.
To better serve consumers during the pandemic. We've also made curbside pickup available to date nearly 50% of consumers picking up their orders at our stores have opted for curbside service, which is also margin accretive relative to shipping to the home.
Our omni channel customers, those who shopped in stores and online our highest value customers spending nearly three times the amount of a single channel customer on an annual basis.
Our speed of delivery of ecommerce orders from our distribution Center Thankfully has returned to normal generally within four to five days.
Delivery speeds were slower than desired earlier in the quarter. Many online retailers had a similar experience.
As online demand surge during the store closure period, we carefully ramped up staffing in our distribution centers to ensure the safety of our employees.
We are grateful for the dedication of all of our distribution center coworkers, many of whom have been supporting holiday level demand for our brands. Since the end of March. They have also helped us ensure a safe work environment for thousands of our employees.
Given the continued acceleration in online demand for our brands, we have decided to exit more stores over the next five years prior to the cobot experience, we had planned to close more stores than we would open by 2024.
In round numbers, we plan to open about 100 co branded stores in densely populated areas over the next five years that continues to be our plan.
We had also previously planned to close a 115 stores, mostly standalone brand stores in outlet stores and declining centers.
Based on a reevaluation of our store portfolio, we now plan to close over 200 stores or about 25% of our stores in the United States by 2024.
Our average lease term is less than two and a half years, including early termination options. We plan to take advantage of those early kick out provisions in exit more stores as leases expire.
Our focus is on fewer better and more profitable stores located closer to consumers that among other things enable the same day pickup of online purchases.
And the next few years, we expect it will be a buyers market for retail store locations and we plan to pursue those better market opportunities.
As some of our competitors and wholesale customers closed stores, we believe we'll see a transfer benefit from those stores closures as well as ours. We continue to see about 20% of sales from stores that we close transfer over to our other stores in adjacent markets those sales flow through at a very high margin given the fixed.
Cost structure of our stores.
In the second quarter, we saw the second largest decrease in sales in our wholesale segment due to store closures and related order cancellations.
Commerce demand in wholesale was up over 100% to last year each of our top for wholesale customers saw triple digit growth and online demand for our brands.
In the second quarter, we were encouraged by certain retailers pulling forward orders previously placed on hold in March.
For some of our largest customers we've been in a chase mode and we are possible, we're moving up the receipt of certain product offerings to service higher than planned demand.
Collectively we expect to see continued growth with our exclusive brands in the balance of the year. Our exclusive brands are now expected to grow to about 50% of our wholesale sales this year up from 40% last year.
Other retailers, who suspended store operations in the second quarter are expected to curtail inventory commitments in the balance of the year.
We believe there is a higher risk of additional store closures due to the pandemic and shift to online demand anticipating those changes in demand, we reduced our planned inventory commitments for certain wholesale customers.
Were the largest plan decreases in our wholesale sales in the balance of the year is with off price retailers historically, we've seen better price realization and profitability moving excess inventory through our own stores.
Accordingly, we plan to temporarily keep open certain stores that were scheduled to close this year to drive inventories lower at better levels of profitability.
International sales contributed about 9% of our total sales in the second quarter down from 11% last year, largely due to store closures in Canada and Mexico.
The E commerce component of our international business tripled in the quarter and its growth covered about a third of the lost store sales.
The wholesale component of our international sales was also lower we're encouraged by the higher demand, we're seeing from Walmart in Canada and from Amazons launch of our simple choice brand in Europe.
Many of our other wholesale relationships are with several smaller retailers, representing our brands throughout the world.
We expect sales to those retailers will be weighed down by the pandemic stronger dollar and other local market challenges in the balance of the year.
With respect to our supply chain, we're seeing some delay in the receipt of product from Asia like Carters, our suppliers are focused on keeping their employees healthy and safe while they manufacture our products.
We're also seeing some back up at the Asian West Coast ports, which is compounding late deliveries from some of our suppliers.
Delay in shipments from Asia is a higher risks than normal in the balance of the year.
Our supply chain team together with our channel leaders have done an excellent job, reducing our exposure to excess inventories and related losses.
Inventories were much lower than planned at the end of the second quarter and lower than last year.
We expect inventory levels to run lower than 2019 for the balance of the year.
Among other things our supply chain team is now focused on supporting the acceleration in E commerce demand through the year end holidays with the surge in demand we've seen since March we believe were better prepared heading into the holiday season. This year.
In summary, we believe Carter's is weathering the disruption in the children's apparel market better than we had expected we consider ourselves fortunate to own two of the most iconic brands in young children's apparel.
Carter's and Oshkosh B'gosh brands have been enjoyed by multiple generations of consumers for the past 100 years.
We own the largest share of the baby apparel, sleepwear and playwear markets for young children.
We focused on essential core products bought in multiple quantities on a frequent basis in those early years of a child's life.
Our average price points are less than $10, providing a great value to consumers in a weaker economic environment.
We are the largest supplier children's apparel to the largest retailers in North America. We're also the largest specialty retailer of young children's apparel and our Carter's brand is the best selling children's apparel brand online in the United States and Canada.
Together with the support of the largest retailers of young children's apparel, we expect the online sales of our brands to exceed $1 billion. This year.
The disruption caused by the Corona virus is expected to weigh on the growth. We had planned in the balance of the year that said, we have thousands of dedicated employees on the frontline everyday representing our brands and serving the needs of all families with young children.
I am grateful to all of our employees for supporting Carter's through this significant disruption in their lives and livelihoods with their support I believe Carter's will outperform the market through this pn demick emerge stronger from it and continue providing the very best value and experience in young children's apparel.
Richard will now walk you through the presentation on our website.
Thank you Mike good morning, everyone.
Begin on page two of our materials with our GAAP income statement for the second quarter.
We delivered a much stronger quarter than we had expected net sales were $515 million down 30% from last year reported operating income was $21 million down, 68% and reported EPS was 19 cents compared to 97 cents a year ago.
Our second quarter reported results for 2020 in 2019 contain some unusual items, which we have detailed on page three.
We have treated these items as non-GAAP adjustments to our reported results for greater comparability.
And this year second quarter. These items include covert 19 related expenses store lease impairments and organizational restructuring costs.
Recall that in the first quarter, we had additional meaningful charges related to goodwill and intangible asset impairment.
Our remarks today will speak to our results on an adjusted basis, which excludes these items.
Turning to page four in our adjusted Pan out for the second quarter.
Again, net sales were $515 million down 30% from last year due to lower sales across the business with the most significant sales declines occurring in our stores and in our wholesale channel due to covet.
As Mike said, a real bright spot in the quarter was exceptionally strong demand in E commerce with triple digit growth in both the U.S. and in Canada.
While gross profit was down because of the decline in sales gross margin rate improved by 170 basis points, driven by improved realized pricing and good progress and moving through our excess inventory.
Royalty income declined to $4 million from $10 million last year due primarily to store closures in both the retail and wholesale channels.
Okay income was also down due to business model changes, including product category in sourcing.
We managed expenses, while in the quarter with spending down about $70 million year over year.
Spending was lower across most expense categories, particularly store expenses, given the closures in the quarter as well as lower spending on distribution freight and marketing.
Operating expenses related to ecommerce such as fulfillment costs were up versus last year, given the significant growth in sales in this channel.
Adjusted operating income was $41 million compared to $64 million last year, we achieved an adjusted operating margin of 8%, which was down only 70 basis points compared to 8.7% and the second quarter of last year.
Below the line interest expense was $15 million up from $9 million last year due to higher borrowings on our revolving credit facility and new financing executed in the quarter.
Our average share count was 4% lower compared to last year driven by share repurchases in 2019.
As part of our liquidity improvement initiatives, we suspended share repurchases in the first quarter.
On the bottom line, our adjusted earnings per share were 54 cents compared to 95 cents last year.
Again these results were substantially better than we had expected.
Turning to page five with some balance sheet and cash flow highlights. We ended the second quarter with a very strong balance sheet, which reflects in part our improved inventory position and working capital initiatives.
Our total liquidity at the end of the quarter with substantial $1.5 billion. In total we had $1 billion of cash on hand, and approximately $500 million and available borrowing capacity under our $750 million revolving credit facility.
Our Q2 accounts receivable balance declined 1% compared to last year, we believe the quality of our receivables is high.
We already have a Q2 balances comprised of receivables from read from retailers, who is operations have been less affected today by covet 19.
Quarter end net inventory declined 4% compared to last year, which was substantially better than we had previously forecasted as discussed our sales were higher than anticipated. We've also made good progress working through excess inventory.
And our last update we told you we were tracking to about $110 million of inventory, we were planning on packing and holding for sale next year.
Principally because of accelerated demand from some of our wholesale customers. This balances now approximately $70 million.
We believe our inventory quality at the end of the second quarter as high with known issues appropriately reserved given our improved inventory position our reserves for inventory were approximately $10 million lower than at the end of the first quarter.
Based on our current outlook for the business and given the significant steps we took to reduce second half inventory commitments. We are planning that net inventories will be lower year over year at the end about the third and fourth quarters.
Accounts payable or approximately $460 million at quarter end compared to $233 million a year ago. This increase reflects the successful extension of payment terms and rent deferrals.
We've received excellent support from our vendors and our landlords as we've managed through the extraordinary challenges presented by this pandemic.
Long term debt increased to approximately $1.2 billion up from approximately $600 million in last year's second quarter.
In May we executed a very successful financing transaction raising $500 million in new senior notes.
These notes carry a coupon of 5.5% and mature in 2025.
Factoring in our significant cash position, our net debt was $232 million actually down compared to the end of second quarter last year.
Well I forecasted not indicate the need for incremental financing we felt it was prudent given the uncertainty surrounding the pandemic to take advantage of the opportunity to further bolster our liquidity.
We saw excellent demand for our transaction and we achieved essentially in about an investment grade covenant package.
We used the proceeds of the new notes to pay down a good portion of the outstanding balance on our revolver.
As we told you on our last update we have received strong support from our bank group, which approved waivers of financial covenants under our revolver for the balance of 2020.
And relax covenants for most of next year.
Based on our current outlook, we anticipate that we will have more than adequate liquidity to manage our operations and importantly, we'll be able to continue to invest while our business and the broader marketplace began to recover from covet 19.
First half operating cash flow was strong at nearly $240 million up from $104 million last year, as our working capital and liquidity initiatives have more than offset lower earnings.
Now moving to page seven with a summary of our segment results for the second quarter as we've set our consolidated sales were down about $220 million. This is actually just about the decline we posted in store sales, which was offset by over $100 million of growth and U.S. ecommerce sales.
Wholesale and international segment sales also declined in the quarter.
Consolidated profitability was down just over $20 million with a 70 basis points decline in our consolidated adjusted operating margin.
We saw operating margin declines in the U.S. retail and international segments and operating margin expansion in U.S. wholesale, which I'll describe more fully in a moment.
Corporate expenses were well managed during the quarter down $8 million versus last year and unchanged at 3.6% of consolidated sales.
Turning to second quarter results for the U.S. retail segment on page eight.
Total segment sales declined 25% compared to last year, reflecting the significant disruption from store closures and the second quarter.
After closing all of our stores in mid March for the safety of our customers and employees. We began to gradually reopened stores in early may Reopenings accelerated in June and we ended Q2 with approximately 97% of our stores open for business.
We saw good demand in stores once they reopened after reopening stores collectively comped up 8% and the second quarter with strong conversion and higher transaction value is more than offsetting declines in traffic.
We had particularly good momentum later in the quarter with June retail comps up over 18%.
As we've said E commerce demand was very strong in the quarter with comparable sales increasing 101% over last year.
During the quarter, we saw significant acceleration and omnichannel activity, including orders picked up by customers in store and order ships ships to consumers' homes from our stores.
You asked retail adjusted segment income was $33 million in the second quarter compared to $50 million last year. This lower overall profitability was principally due to the store closures and expense deleverage.
As Mike commented, we saw meaningful improvement in the profitability of ecommerce and the second quarter driven by the significant increase in sales improved price realization and expense leverage.
On page nine as our stores have reopened we've been focused on providing the safest hospital environment for our customers and employees.
We're practicing good social distancing and have increased our cleaning protocols like.
Like most other major retailers. We've also adopted a masks for all approach in our stores.
On page 10, we've been leveraging our existing and new omnichannel capabilities and the second quarter, we fulfilled approximately 13% of online orders through our stores. This metric was as high as 30% at certain points during the quarter.
The ability to leverage our stores provided a much needed capacity boost as we constrained activity in our principal ecommerce distribution center.
We continue to see an increasing proportion of customers who want to pick up their online orders the same day by visiting their local store.
We've also begun to make curbside pickup available at our stores, which is obviously they have great appeal given the current environment. The services currently available on approximately 500 stores.
On page 11 in recent months, we've all become familiar with the reality and the need to wear masks are design merchandising and supply chain teams have collaborated to develop a line of face masks for children.
This work was performed on an extremely accelerated timeline and these products have become instant best sellers. We've received very very very favorable feedback from consumers, particularly regarding fed quality and value with a price point of $3.
On the next several pages, we have updates on some of our recent marketing activities. Our marketing team has been working overtime and finding new and innovative ways to connect more closely and in a more meaningful way with our customers.
We leaned into brand building moments in our marketing during Q2, knowing the families for craving emotional connection moments of Joy and support, especially in these troubled times.
We believe that the Carter's and Oshkosh brands occupy a unique place and the hearts and minds. The parents. This is a competitive advantage for our company and one which we intend to develop further throughout 2020 and beyond.
As you'll see our efforts are focused on the digital space, specifically, creating virtual communities of families with young children.
On page 12, Weve recapped, our recent partnership with Kelly Clarkson, who joined us and hosting a virtual baby shower for moms, who showers were canceled because of co that.
This is all part of our declaration of May as the month of mom.
We also partnered with some other leading brands, including Huggies calls and Johnson and Johnson to create an event, which resulted in 1.3 billion earned media impressions and which was featured on the Kelly Clarkson show on July 14.
Hi page 13, we also leverage the strength and heritage of the Oshkosh brand in the second quarter, especially as a long history of standing for fun and play.
As we previewed with you on our last call we held camp Oshkosh online from mid June to early July.
This was a virtual camp with a variety of different activities for kids. This event was another way to support families. After distance learning for fiscal year ended and given that many in person camps have been canceled around the country.
This event also had a celebrity tie in with actress Molly Sims, serving as our host.
Camp Oshkosh drove incredible engagement from our fans and all of this event online content content was created by our unemployment working from home.
On page 14, we wanted to highlight our company's response to the tragic event in Minnesota, and the resulting social unrest, we've seen across the nation in recent weeks.
Our messaging here on social media emphasizes our support for diversity and inclusion and states our absolute commitment to fighting racism.
In recent weeks, we've also engaged our employees and a number of discussions reinforcing our commitment to diversity and inclusiveness as a company.
It has been very positive and constructive conversations which have reinforced our winning company culture, and which it provided us with valuable insights as we seek to make our company even better.
On page 15 June was pride month, our social media postings celebrated pride and were consistent with our company's state admission to serve the needs of all families with young children.
We also feature some beautiful product part of our Pride inspired collection.
Now turning to page 16 for a recap of U.S. wholesale results for the second quarter net sales declined to 34%, which reflects the fact that many of our wholesale customers close to their stores for much of the second quarter and canceled or delayed planned shipments from us.
In Q2, we saw continued good demand for exclusive brands sold by Amazon target and Walmart These retailers along with several other of our customers, we're able to keep their stores opened during the pandemic.
Much like in our own retail business many of our wholesale customers saw strong demand in their online businesses and the second quarter, while their stores were closed.
We were able to support strong wholesale online demand for our products, which we've estimated grew over 100% in Q2.
Yes wholesale adjusted segment income was $29 million in the second quarter compared to $35 million a year ago segment margin was 19% up 360 basis points compared to 15.4% last year.
This improvement was driven by lower inventory related charges as our current and projected excess inventory positions have improved and we had lower sales to off price retailers.
Moving to page 17 at second quarter results for our International segment International net sales were $47 million compared to $82 million in the second quarter of last year.
Prior to the U.S. the decline in sales, which it was due to store closures in Canada, and Mexico and lower wholesale shipments both as a result of the worldwide pandemic.
We saw good growth in online sales in both Canada and Mexico.
Ecommerce is a new business for us in Mexico, and we've seen consumer demand in this channel ramp up much more rapidly than we had anticipated.
The pace of Star, we openings in Canada lacked the U.S. somewhat all Canadian stores have now reopened and we've seen a good rebound in store sales since reopening.
Beyond our businesses in Canada, and Mexico, the rest of our international business largely relates to wholesale relationships around the world.
That's what our multi national wholesale customers, such as Walmart Cosco and Amazon has been got.
As in the U.S. These retailers have been able to keep their business is up and running around the world.
The remainder of our business with our international partners has been under more pressure as these largely smaller retailers have been challenged by economic conditions in their individual markets, including managing through the effects of a stronger U.S. dollar.
Our international segment posted a loss of $3 million in the second quarter compared to income of $4 million last year, largely due to the effects of the pandemic related store closures.
On page 18, 2020 was intended to be another good year of investment in the business.
On the extent of the potential disruption from Cobot 19 became clear we revisited our planned spending we scaled back spending on some projects and deferred others entirely.
Given the strength of our performance in the second quarter and our improved outlook for liquidity. We believe we have an opportunity to lean into our investment agenda that more than we had envisioned a few a few months ago.
We believe our ability to invest in the business as a competitive advantage with so many others having to cut back right now.
Another key areas of investment are summarized on this page they range from continuing to develop our marketing ecommerce and omni channel capabilities to accelerating work around further optimizing our cost structure and long term distribution capacity.
And finally on page 19, given the continued uncertainty surrounding the pandemic, we're not providing specific financial guidance. This morning.
It's important to remember the second half has historically been the most significant part of the year in terms of overall sales and profit contribution.
We expect that cover 19 will continue to have a significant impact on our operations and the second half.
We expect that will be profitable in the third and fourth quarters, albeit not at the same levels as last year.
And we're monitoring a number of risks right now most notably we're watching trends in consumer traffic to our stores, especially given the backdrop of increased cobot 19 cases around the country.
We're also mindful of overall economic conditions, including unemployment and consumer confidence, which may fluctuate as they move through the second half of the year.
In the appendix of the presentation. We've included information on our year to date performance and some other supplemental schedules, which we hope you'll find helpful.
And with these remarks, we're ready to take your questions.
Thank you ladies and gentlemen at this time the floor is open for your questions. If you would like to ask a question that you may do so now by pressing star one.
If you are using a speakerphone. Please make sure that your mute function is disabled tool out of your signal to reach our equipment again to ask your question. Please press Star one now our first question comes from David a Buckley with Bank of America.
Good morning, guys. Thanks for taking my question.
First our sales with their exclusive brands into Q compared to the rest of the wholesale channel.
Then can you discuss in a little bit more detailed improved profitability in the wholesale channel during twoq, how much was due to lower sales to off price and just how should we think about margins in that channel for the remainder of the year.
Yes, so as far as exclusive brands in Q2 are our sales to exclusive branded customers were actually higher in Q2 than they were last year. So the the remainder of the account base was obviously lower our scoped pop products were comparable to last year.
In terms of margin or we had good margin performance. Overall, there was also an inventory adjustment made which positively impacted margins.
Okay and then just have you what have you seen in states with recent surgeon virus cases.
In a material drop off in store performance in those.
Your connection is a 100% clear but your question in terms are we seeing a drop off in states, where there has been a surge in the grown virus, yes, yes.
No no doubt no doubt about it.
Okay. Thank you. Thank you David.
Thank you. Our next question comes from Paul as you with Citi.
Hi, This is carry on for Paul Thanks for taking your question.
Taking a little more about how you're thinking about the back half year, having to 50% of your wholesale business with your your.
Largest customer is are you planning that up in the back half the year and then when we think about the other 50% on the wholesale business how much should we expect that could be down and then just what are some of the other assumptions, you're making about the back half year in order to habit profitable second half the year. Thanks.
It's a collectively were expecting growth with our exclusive brands in the balance of the year.
Other wholesale customers, who had a closed stores in the second quarter, we expect that they will be more conservative on their buys in the second half we've been more conservative on on buying inventory for them in the second half. So you should assume the other nonexclusive.
Relationship exclusive brand the wholesale customers there the demand from then we expect will be lower in the second half I won't comment on how much lower because it's there's a lot of a year still ahead of us, but we're assuming.
In our models that demand from.
Wholesale customers other than target Wal Mart, and Amazon likely will be lower in the second half, including including off price retailers Kelly to that I would add that we're expecting that the stores will continue to be under pressure I think we've been appropriately conservative around assumptions around store traffic and comps in the stores. We've assumed continued good momentum and ecommerce. So we'll see we expected growth and.
In ecommerce sales and then importantly, where we're planning for gross margin expansion year over year in second half as we continue to make progress on on pricing and working through our excess inventory, but those are probably the major but building bought.
Got it thank you and then.
When we think about the good product costs and spring do you recognize the agency benefit in spring next year or do you plan to reinvest in price to take care.
We are our expectations the product cost for spring.
It will be lower we have no plans to lower prices in spring.
Got it thank you.
Your next question comes from Ike Boruchow with Wells Fargo.
Hey, good morning, everyone.
Good performance in a tough tough market or just a couple from me I guess.
You know the July commentary of 90% of last year. So revenue down 10 is or is there. Some more color you guys could give us just maybe by channel what exactly has transpired over over the initial couple of weeks of July to get you to 90% of last year volume overall.
I think I'd share we've got a couple days left in our fiscal month of July and the good news, we have a strong up retail comp at this point I think we're up about 3% three comp.
With a couple of days to go our online demand is continues to be strong double digits. Our store sales are down as Mike said, there they've slowed where we've got some cold and hot spots and we've got it grew about 12 or 13 stores that we had to re close based on cobot, primarily in California, but at this point in time, we've got three caught up in July.
Got it that's helpful and then maybe for Mike were or Richard.
When you look out now in 2024, it's it's interesting it's helpful to hear about the larger amount of store closing. So 115. The 200 I guess when you guys had given us your loss a longer term view by 2024, you were expecting E com to reach about 42% of DTC sales I imagine that mix is now.
Forecasted to be higher given the ramp and closures, but could you know kind of give us more of an updated view on.
Where E comm penetration could ultimately reach well we hit that 20 with likelihood that 2024 number this year with the store closures, but my guess is it will be high when things settle down my guess is that a ecommerce penetration will be.
Over over 40%, there's still as I shared with you in the remarks last year about 80% of children's apparel was bought in stores only about 20% online we love we love the accelerated growth in online, but when it comes to children's apparel people love to go to the stores, particularly our stores. It's a it's a it's all the.
Things you need for a newborn to about a 10 year old child of all the essentials essential core products and those early years alive. So stores will continue to be important but as as we as we look at the next few years, particularly we have a number of leases coming up for renewal and we have to make a decision.
Do we do we reinvest for some portion of five to 10 years do we invest in capital expenditures refresh all the point of sale or do we do we let those leases expire in search for better locations better co tenancy and so over the next few years. My guess is we'll probably close probably some portion of eight.
80% or more of those 200 stores. So it as leases expire at the analysis, we've done theres no need to accelerate closures.
But with the kick out provisions our average lease terms are less than two and a half year. So we'll take advantage of those.
Early exit options and will exit a more stores and then.
We envisioned we would before the cobot experience, but with the acceleration in online demand for our brands and a more favorable real estate market going forward, we're inclined to exit some of our older store locations ones that don't lend themselves to omni channel services being able to pick up the product the same day.
After you've ordered it online it will search for better or real estate opportunities.
Thanks, Mike you're welcome.
[laughter].
Thank you. Our next question comes from Susan Anderson B. Riley.
Good morning, Thanks for taking my question I have on the corner and I'm wondering how you're thinking about back to school schools do not real pain, or maybe I mean, you're paying 50%.
Maybe I missed what tied down Big day carries no pain and that helped coming on school age children in your customer base and then I'll feel it's kind of curious how big July normally it's very can CNN, assuming it must be bigger given that you start normally would start to see back to school pick up.
Yeah back to school I would say I think Mike commented that we're off to a a little slower start as you'd expect it's very early but we're off to a slower start many of the schools.
If that most I think are going to go virtual so that that event were where she never mind means new clothes for that that event is up as a pressing need is not that right now. So so we'll see how it goes we did cut our falling back to school receipts are we also shifted out our product close because we had census was going to happen and we shipped out our marketing we really haven't started back to school marketing Yeah, I think it. So next couple of weeks.
We will kick that and so so I think it's going to be little slower our actual back to school clothing and uniforms, it's a smaller business for us that our competitors.
We're about a 50% of our businesses and baby so had less impact on us, but that said I think no near term there could be some impact on some of our playwear categories and any Oshkosh brand, particularly its probably a situation where where the demand is going to come more based on the weather changes than the actual back to school shopping event as if you remember in spring.
When the weather turn we saw a big surge in demand late May June and even through July. So I think it's got to be more about.
One does the fall weather change get cooler versus that that impetus to to run out by a bunch of back to school close.
Sitting here in July and August.
Susan just as reminder, over 50% of our annual sales are in baby baby apparel. So all the everyday essentials Bodysuits watch clause towels bibs blankets sleepwear huge part of our business. So that that that business. We expect will continue to be continue to be in good demand as Brian said that fact.
School, particularly school uniforms never big part of our business, but as the weather turns just like it did earlier this year and just like we've seen over many many years when the weather turns when people start to think about long sleeve long Pan outfitting, we typically see a surge in demand for our brands and I'd say in recent years back to school for Us is kind.
I've been a diluted experience at spreads over.
Multiple weeks, if not months, but when the weather turns we typically see.
Surging demand so when we update you again in October will have full visibility to hopefully have better visibility to Oh, how we did when the weather turned.
Okay. That's helpful. And then just Stein I guess market share in the corner do you think that you guys gained in the quicker I think a lot of smaller children's brands, maybe had been shut down in the quarter and then we've seen.
Yeah, like department stores and delivery to maybe there their private label with knives prevalent.
You can you know there's opportunity also looking forward to take some of that market share that's been taken out of them.
So the latest data we have through the end of May suggest that we improved our market share positions.
True true may again, not surprisingly because no one has no one in young children's apparel has the relationship we have with the major retailers of young children's apparel, Walmart target Amazon three of our largest customers Kohl's one of our largest customers, even though colds and basis.
These are close their stores Joe's as we did in the second quarter those stores and re purpose they were shipping online.
Purchases from their stores and the online demand from Kohl's, Macy's and others was robust even though they were closed no. One has those relationships like we do with the major retailers. So not surprising we gained share in to your point going forward My guess with more store closures more of a shift to online customers.
And competitors.
Exiting stores, we believe that's an opportunity for us to gain more share in the market.
The other thing I'd add that we've had a strong number one share and baby and and toddler and based on our age up strategy, which we started to pursue about a year and a half ago for the first time that last 12 months to me.
We have gained a and we now have the number one market share in the kids segment of five to seven year old trial. So we're excited about that that age up strategy seems to be working well for us and we continue to increase the lifetime value of our customers on both a four and a seven year basis.
Great. That's sounds good. Thanks, so much you guys. Good luck there thier. Thank you very much.
Thank you. Our next question comes from John Morris with Davidson.
Thanks, Mike Congratulations in such a tough environment as well.
You know E commerce growth.
As one would imagine in this kind of an environment doing doing really well, but we think one of the really interesting things to track and try to get to read on is the new customer growth and I'm wondering if you can share with us.
If you track that if you have intelligence on it you can share with us the potential or what you've seen with new customer growth.
On E com through this period.
I think that would be a really good way to underscore the strength of the Brad you have any metrics on that.
Yes, I don't know if we'd give specific metrics I can tell you that that since the stores closed our online customers were up about 67% in the quarter and of that the two biggest changes were number one new customers. Some new customers that did not shop us before and then also a kind of delayed the folks the only bought in stores before.
That shifted their spending to online. So we were happy with the performance I would say I would concur with you. The most importantly, the growth in new customers online was very encouraging.
Okay, that's great and my follow up back on the gross margin strength again really impressive performance that it was actually up year over year, you pointed to a couple of different factors here that have contributed to this.
Price price integrity.
You also mentioned the inventory adjustment I'm just wondering if you can bucket.
For me the different factors and.
Somehow quantify the contribution or rank the contribution in terms of what has led to that gross margin strength in the quarter.
I'm sure I'll try out without being overly overlay specifics other than there are a lot of puts and takes in the gross margin line. This this quarter I'd say.
One of the.
Big positives is just the improvement in ecommerce margins. So that's that's a significant effect in the quarter, it's driven by the.
The fact that we had higher higher realized pricing.
Kind of a rationalization of of the ineffective promotions that we perhaps had a year ago. That's probably the single biggest driver that the next big positive would be affected our inventory position has improved the fact that sales were so meaningfully above our forecast and the quality of our inventory answer. It has improved we were able to move through a good portion of what we had reserved for those are the two big positive effects I'd say.
There's a reasonably significant negative mix effect, that's on the gross profit line gross margin line as well.
That's that's principally due to the fact that we had far less.
Retail store sales, which were historically very high gross margin sales, we have a bigger mix of the exclusive brand.
Sales in wholesale those are great operating margin sales they are not as robust on the gross margin line. So I'd say those are John the principal effects on gross margin for the quarter.
Thanks, Richard Thanks, everybody good luck for back to football. Thank you.
Thank you. Our next question comes from Jim Chartier, with Moness Crespi and heart.
Good morning, Thanks for taking my questions.
Just following up on the gross margin question.
Richard given healthy inventory lower off price sales lower product costs any reason, we shouldn't expect gross margin for the back half figure.
No not what went right now we're planning gross margin expansion year over year and second half.
Great and then could you comment what you're seeing sell through at your wholesale customers, excluding Walmart and target since their stores of reopened.
I'd say, it's been robust I'd say for a number of them there they are they're chasing.
Demand and a wish we had more inventory to share with them. So we would say with the reopening similar experience that we had I think demand has been robust.
Great and then finally.
The transition to fall the last couple of years seems to have been challenging some of that effect due to weather, but anything you guys have done from a product perspective to maybe.
Improve your performance during the transition to the full product. Thanks I.
I think a couple of things one based on strategy and one based on the cobot situation, we shifted our fall receive felt we really felt that.
The last several years with the consumer buying trends and the heat that we brought in too much fall to early it wasn't appropriate and the selling was soft so.
We shifted fall received pickup or receipt and shifted them out our our inventory are falling tolling stores right now is down more than 50% from what it was last year. So we've extended the life of spring we have plenty of spring goods as you can imagine that they're selling really well. So we're really planning on selling kind of spring summer mix through labor day, this year and taking the pressure off having to sell.
Ill.
Traditionally fall white goods in July and August and I think to defer the fall product that we are going to bring in is more transitional in nature. As we responded to the selling trends over the last few years. So we're optimistic that will do better that said, we did cut the inventories back from a plan to conserve Lee and we'll see how the the demand goes as we move through the fall season.
Great. Thanks for the color.
Our next question comes from Jay sole whether you'd be yes.
Great. Thank you. So much you don't want to follow up on the gross margin question, but you could you maybe just give us an idea with the difference in gross margin is between.
US retail stores sale and E commerce sale and like what it was in Q2.
Well I'd say historically, there was a fairly significant delta because the shipping costs for the consumer are reflected in the gross margin line that was the case a year ago that spread has narrowed significantly because of the improvement in gross margin in the ecommerce business.
I'd say, they're they're relatively consistent for the second quarter of this year and the path that was there was a loss not what lot more daylight between the two.
So I guess with more or the omni channel sales happening in Q2, Byerlein ship to store I assume that lowers the shipping cost, which helps improve the gross margin you project that going forward I mean as the environment Normalizes. Hopefully you think people continue to use those options to fulfill their order or does it go back to whaler shipping costs and maybe you saw last year.
So I think the trend was positive before covert it's accelerated because a couple of it I don't know whether whether it's our stores or restaurants, I think people, who have gotten comfortable placing their orders on line swing in buying and picking up what they need. So my guess is that trend will continue would make you again, we saw a surgeon. It every quarter, we'll update you on what we're saying but were incurred.
Urging that because we want people to order online swing by the store its margin accretive when they pick up the order in store and when they come to the store now that the reopened more often than not they see something in the store the catches there I and they increased the total purchase. So so this is why we've invested over the past few years to add these.
Capabilities, including Curbside curbside was accelerated that because the covance situation, our retail team did an excellent job.
Putting in a new procedures to it to provide that experience for people, who might have a child or two sitting in the back seat instead of having them give it out of the car seat and make their way into stores.
To give us a call and we're happy to run the product out to the curbs. So they can pick up what they need and go on their way.
Very interesting thanks, Mike.
You're welcome.
Thank you. Our next question comes from a warrant Ching with Evercore ISI.
Hey, good morning, Iceland fall ask a follow up question on focus and curbside.
At the start capabilities.
Ramps up in the last few months.
So first how much that factor into your decision to up that store closure plan from 115 to 202nd are there any metrics you can share your productivity and cost to give us an idea.
Those stores that are getting a lot of both curbside pickup how much is it boosting the productivity of this letters.
Well I will tell you the on the first part of the analysis that we did the stores that will are being closed have a very low penetration of omni channel sales. So so whether they're an outlet store located 45 minutes away were from where most people live people are not inclined to swing by and pick up the product that you soon have a chip.
To their door, so the omni channel.
Service capabilities that the acceleration of that did weigh into stores that we will close those that have low omni channel penetration are more likely to be closed and then the the productivity in comps of where we're it's offered it's additive there's no question it's additive.
Okay got it. Thank you and just one clarification you mentioned, yes, we will be a buyers market coming out of the pandemic or some of these real estate opportunities.
But your new store plan was unchanged is that there is opportunities just not yet factored into the plan.
Well, it's early I just at this point I don't see any reason to take up the store opening plan I think what's important for you know there will continue to be new opportunities for us to open stores consumers love shopping in our stores and in many cases were closing stores. It's because it's a new were better center as opened in adjacent Mark.
But with better co tenancy better access for consumers.
And many of these stores that were closing our older stores and and it's certainly not the same experience.
In a new store locations. So so for now that the game plan is is the continued opened stores thoughtfully overtime, we'd actually we actually slowed down the pace of store openings.
This year.
And just to see how that how the things settle in the post cobot environment.
Thank you good luck, thanks very much.
Thank you our final question will come from William Reuter with the Bank of America.
Good morning.
Just have to the first is with regard to the accelerated store closures will this only be when leases expire or do you expect that some of these you may pay to get out of the leases and I guess could this be a meaningful amount of money.
No.
It'll be it'll be the former it's when leases expire or theres, a kick out option available to us we've done the analysis, there's no need for us to accelerate store closures.
And well in advance of the lease expiry date, we'll do it when the leases expire.
Okay. That's good to hear and then secondarily you know you were very cautious with regard to issuing debt this year to improve your liquidity, but things kind of seem okay.
When would you consider no share repurchases or other you know.
Or dividends et cetera.
Essentially reduce your liquidity.
Sure Bill I'd say, we probably have a a good portion of the year ahead of us we'd have to see how the second half plays out we do have some restrictions right now under our bank agreements that would prohibit us from distributing capital for dividends or share repurchases. If we're in.
Such a great position as we get into next year and we have just loads of excess capital. That's a discussion that we can pursue again with with our with our bank partners and say it would be period and but at the moment, we're not envisioning it that it would that we would be distributing capital until we get into next year and have a better read on the business.
Makes sense I think thought.
Thank you. Thank you.
Thank you I'd like to turn it back to Mr. Casey for closing comments. Thanks very much. Thank you all for joining us on the call. This morning, we look forward to update here again on our progress in October till then stay safe best wishes to all of you into your families Goodbye everybody.
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