Q4 2020 Carter's Inc Earnings Call
Okay.
Good day and welcome to Carter's fourth quarter 2020 earnings conference call on the call today are Michael Casey, Chairman and Chief Executive Officer, Richard Westenberger, Executive Vice President and Chief Financial Officer, Brian Lynch President and.
Sean Mchugh, Vice President and Treasurer. After today's prepared remarks, we will take questions. As time allows Carter's issued its fourth quarter 2020 earnings press release earlier. This morning, a copy of the release and presentation materials for today's call have been posted on the investors.
Nations section of the company's website.
I I'll duck Carter's Dot com before we begin let me remind you that statements made in this conference call and in the company's presentation materials about the company's outlooks plan and future performances of forward looking statements actual results may differ materially from those.
The 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 of various non G. A a P financial measurements a reconstitution of the visa non GAA P financial measurements to the G. P. Financial measurements is provided in the company's earnings release and presentation materials also today's call is being recorded.
Good.
And I would now like to turn the call over to Mr. Casey. 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.
It was a year ago. This week that we reported our 30 <unk> consecutive year of sales growth.
And 2019, we achieved record levels of sales earnings per share and cash flow.
As you May recall 2020 got off to a good start for us with mid single digit growth and sales through February 'twenty and 'twenty was forecasted to be another good year of sales and earnings growth.
By mid March our global pandemic and National Emergency has been declared and the lives of people throughout the world were disrupted.
And the months of that followed we worked to keep our employees and our store customers safe from the virus.
We reduced spending negotiated lower product costs and improved liquidity with.
We significantly reduced our exposure to excess inventories caused by temporary store closures and by curtailing inventory commitments, we were able to improve price realization and margins the last year.
When the pandemic hit we accelerated the execution of new capabilities to support the same day pickup of E Commerce orders and our stores curbside pickup and the direct shipment of e-commerce orders from our stores.
We engaged remotely with our wholesale customers and leveraged our investments and digital product imagery and secured higher bookings for our product offerings. This year.
We also engaged more deeply and effectively with consumers through social media and building a virtual community of families with young children.
During the pandemic, we added over 2 million new e-commerce customers and with the support of our wholesale customers. The online sales of our brands exceeded $1 billion of last year.
The pandemic was a challenging experience for all of us, but it also enabled us to find new ways to improve our business.
We believe the foundation of our company is now stronger because of the pandemic and we're better positioned to weather future storms that may occur.
This morning, we're reporting nearly $1 billion and sales for the fourth quarter of 2020. It was the strongest quarter of the year in terms of sales and earnings contribution and the and the performance was in line with what we had planned.
We're reporting a record gross profit margin and the fourth quarter enabled by a stronger product offering leaner inventories and more effective marketing.
As planned spending grew in the quarter, driven by investments and e-commerce, better staffing and retention and our distribution centers and the partial restoration of compensation for all of our employees.
Compensation was curtailed for several months earlier in the year.
With respect of sales trends, the fourth quarter and got off to a strong start with October sales at 95% of prior year sales consistent with the very strong demand we saw in September.
On a comparable basis normalizing a holiday calendar shift and excluding the 50 <unk> week November and December sales were 84% of prior year sales.
Our best analysis of the deceleration and demand relative to September and October reflects lower store traffic due to the resurgence of the virus heading into the final months of the year.
Recall that health officials warned us all of the stay home and avoid traveling over the Thanksgiving and Christmas holidays, and we remain on inventories heading into the holidays and less promotional than last year.
Sales trends improved meaningfully at the end of December and continued into January we saw growth and January sales and are expecting first quarter sales to be comparable to last year.
March is expected to be the largest month of sales and earnings contribution and the first half. This year March sales have historically been driven by Easter holiday shopping and the arrival of spring like weather and more parts of the country.
We're expecting very good growth and the first half of this year as we comp up against temporary store closures last year and for the year. We're also expecting good growth and sales and profitability. Despite the lingering effects of the pandemic.
Our retail segment was the largest contributor to our fourth quarter sales and profitability.
All of our U S stores remained open for the quarter that we did curtail of ours, 13% based on the lower traffic.
Covid continues to have a material impact on store traffic our border and tourist stores have been most affected by the pandemic our border and tourist stores represent 10% of our U S stores the contributed over 20% of the decline and comparable sales.
This past year, we saw fewer international guests and our stores and fewer shopping with us online and part we attribute the decline and online demand from international customers to a significant reduction and our promotions this past year.
Those who came into our stores and the fourth quarter same day by our store conversion rate grew 5% and the quarter. The average transaction value grew 9% driven by higher units per transaction and better price realization.
We ran much leaner and store inventories and the fourth quarter recall that we curtailed fall and winter inventory commitments when the risks of the pandemic became clear to us in March.
And with leaner inventories, we focused our marketing less on promotions and more on the beauty of our product offerings.
And the fourth quarter, 94% of our comparable stores were cash flow positive of.
Our mall stores saw the largest decrease and comparable sales, 90% of our stores art and open air shopping centers and these stores outperformed the chain.
As we shared with you last year, we plan to close about 25% of our 2019 store portfolio upon lease exploration.
About 60% of those closures are planned this year, 80% of the closures are planned by the end of next year.
These stores collectively contributed over $140 million and sales in 2020, with an EBITDA margin of less than 3%.
By comparison, the balance of our stores had an EBITDA margin of nearly 18%.
Our focus is on fewer better higher margin stores located in more densely populated areas that provide a higher level of convenience the in store and online customers.
Our store closure plan is expected to be accretive to earnings in 2021, and provided $10 million cumulative earnings benefit by 2025.
E Commerce continues to be our fastest growing and highest margin business E. Commerce penetration grew to 45% of our retail sales up from 38% and the third quarter.
Increasingly we are seeing customers enjoy the convenience of picking up their online purchases at our stores located closer to their homes.
Harmony channel sales grew to 24% of our e-commerce orders and the fourth quarter up from 12% last year.
Last year, we leveraged our stores from Maine to Hawaii, the ship online purchases from over 600 stores.
As a result, we improved the speed of delivering online purchases and improve the profitability of our ecommerce business.
We expect the mix of omni channel sales to grow to nearly 40% of online orders by 2025.
Our wholesale segment was the second largest contributor to our fourth quarter sales and profitability.
Collectively we continued to see double digit growth with our exclusive brands, which were margin accretive and the quarter.
E Commerce sales of our brands through our wholesale customers grew over 30% and the fourth quarter and up over 50% for the year.
Sales of our flagship Carter's brand were lower and the fourth quarter, reflecting our decision to curtail fall and winter inventory commitments.
Off price sales were also lower and the quarter the excess inventories created by temporary store closures and related cancellations due to the pandemic, we're largely sold through our own stores at higher margins.
Going forward, we will continue to use our own stores to move through a higher percentage of excess inventories rather than selling to the off price channel.
Spring selling is off to a good start with our wholesale customers. They too are leaner on inventory and have a lower mix of prior season goods and are seeing better price realization and margins were.
We're projecting very good growth in wholesale of this year, especially in the first half assuming all stores remain open.
Our international segment contributed over 11% of our fourth quarter sales.
Canada, and Mexico contributed nearly 90% of our international sales.
Our e-commerce sales in those markets grew over 60% in the fourth quarter and grew to 30% of our international retail sales from 18% last year.
Both businesses performed remarkably well, despite COVID-19 related store closures and the fourth quarter, and Canada and Mexico. Many of our stores were closed and the weeks leading up to Christmas some of those closures continued through February.
The strength and our international wholesale sales was our simple joys brand sold exclusively through Amazon and that business nearly doubled in the fourth quarter with Amazon's expansion of our brand into Europe and Japan.
Most challenging component of our international segment is with smaller retailers, representing our brands and over 90 countries.
And though individually small collectively they contributed about 15% of our international sales and 2019 and where margin accretive.
Wholesale sales to these retailers were down over 50% and the fourth quarter.
Based on bookings from these wholesale customers were projecting a good recovery and this component of our business this year.
Our supply chain and an excellent job supporting the continued acceleration and e-commerce demand and the fourth quarter.
The speed of delivering online purchases was meaningfully better than last year, and we saw of related improvement and our customer satisfaction ratings.
And 2020, we invested to ensure the safety of our distribution center employees raised their wages to improve staffing and retention and invested in technology to improve the speed of delivery.
Our supply chain team also negotiated lower product costs for 2021, which may enable us to further improve our gross profit margin this year.
And the fourth quarter, we began to see delays and the receipt of products from Asia.
Our suppliers, we're running on average 10 days late due to COVID-19 related challenges and precautions and transportation delays.
Since the reopening of stores last summer there has been and at a surge of imports into the United States.
As a result, there is an unusual shortage of cargo containers and Asia further delaying the shipment of our products to the United States.
Given the imbalance and the supply and demand for cargo containers the cost per container has risen significantly in recent months.
This is the macro issue our best information suggests we will see delays and higher transportation rates for most of the first half.
The surge in imports has also caused congestion at the west coast ports, and California, adding additional time to the receipt of goods.
Our wholesale customers are challenged by the same delays.
The late arrivals of our warm weather products and there is plenty of warm weather ahead of us.
To date, we have not experienced any meaningful order cancellations, but thats the higher risk of the unusual given the abnormal delays and deliveries from Asia.
Since our last call with you we have revisited the longer term potential of our brands.
By 2025, we expect sales to grow to nearly $3 $7 billion with and expansion of our operating margin to 13%.
Our growth strategies are focused on leading and e-commerce.
Winning and baby.
Aging up our brands and expanding globally.
Our Carter's brands have the largest share of the e-commerce children's apparel market in the United States.
And the fourth quarter Carter's online experience was rated as one of the top user experiences among the largest of the U S and European E Commerce websites.
We also have unparalleled relationships with the leading retailers of young children's apparel, including Amazon and target Walmart Kohl's and Macy's.
Carter's is the number one brand and baby apparel with over four times. This year of our nearest competitor it's been the best selling brand in young children's apparel for generations of consumers.
It's possible that we may see fewer births and near term due to the pandemic. We've seen births declined almost every year since the great recession began in 2007.
And since 2007, and our sales and earnings of more than doubled.
With the promise of vaccines more broadly available this year government stimulus, helping families with young children historically low interest rates strong housing market and an improving economy, we view of the risk of fewer births as a potential short term challenge, but not of longer term obstacle to our growth.
We are of the number one market share and the baby and toddler apparel markets.
The largest growth and our sales before the pandemic, both and percentage and absolute dollars was driven by our product offerings focused on 10, five to 10 year old children.
With the continued success of our age up initiative.
And the reopening of schools. This year, we expect that our age of strategy will be a good source of growth for us in the years ahead.
We plan to extend the reach of our brands globally and profitably international sales contributed about 12% of our consolidated sales in 2020 and are expected to grow to 15% of sales by 2025.
Over the next five years over 60% of our international sales growth is forecasted to be driven by our multi channel operations in Canada and Mexico.
Our brands are also sold through Amazon, Walmart and Costco on a global basis.
We expect good growth from these multinational retailers and other retailers who are extending the reach of our brands to families with young children throughout the world.
In summary, we strengthened our business this past year, and we're expecting a good multiyear recovery from the pandemic.
We have built a unique multi brand multichannel model, which we believe is well positioned to grow and gain market share.
We're committed to strengthen our business and provide good returns to our shareholders and the years ahead.
One of the thank all of our employees throughout the world, who are working to support their families and our company through this pandemic and for their commitment to help us achieve our growth plans.
Richard will now walk you through the presentation on our website. Thank.
Thank you Mike Good morning, everyone I'll begin on page two with our GAAP income statement for the fourth quarter net.
Net sales and the quarter were $990 million down 10% from the prior year the.
And this year's fiscal year included a 50 <unk> week. So the fourth quarter consisted of 14 weeks versus 13 weeks last year.
This extra week represented $32 million and additional net sales in 2020 and contributed roughly $1 million of operating income.
Reported operating income was $134 million of decrease of 18%.
And reported EPS for the fourth quarter was $2 26 down 20% compared to $2 82, a year ago.
On page three of our GAAP income statement for the full year, obviously sales and earnings this past year, we're meaningfully affected by the global pandemic.
Net sales for the year were just over $3 billion of decline of 14%.
The reported operating income was $190 million down nearly 50%.
And reported EPS for the year was $2 and 50 down 57% from $5 95 and 2019.
Our fourth quarter and full year results for both 2020 and 2019 contained unusual items, which are summarized on page four we.
And we've treated these items of non-GAAP adjustments to our reported results to enable greater comparability and to provide what we believe is a clear view and of the underlying performance of the business Irobot.
My remarks today, we will speak to our results on an adjusted basis, which excludes these unusual items.
On page five we summarize some highlights of the fourth quarter. It was a strong finish to what's obviously been and eventful and challenging year.
We met our expectations overall for our financial performance and the quarter. We saw good continued momentum and several important parts of our business E. Commerce comparable sales were strong up 16% and the U S and up 47% and Canada.
Our store sales and the U S was stronger than we had forecasted and part due to a slight improvement and the store traffic trend in December.
A real headline and driver of our fourth quarter performance was gross margin, which expanded significantly over last year. This was an acceleration over the gross margin expansion, which we achieved and the third quarter.
Despite lower earnings our cash flow was very strong and the air reflecting our working capital initiatives implemented in response to the pandemic.
And our balance sheet and liquidity both were in great shape at the end of the year.
Turning to page six for a summary of net sales for the fourth quarter reported net sales declined 10% to $990 million.
On a comparable 13 week basis, net sales declined 13% year over year.
I'll cover our business segment results and some more detail in a moment, but as we had expected sales were lower year over year across the business.
Sales were negatively affected certainly by the ongoing disruptions of the pandemic, but also in part due to some of our decisions earlier in 2020 to curtail our fall and inventory commitments.
In recent weeks, we have also been further challenged by delays and the planned receipt of inventory. This is an industry wide issue with many companies experiencing delays and the scheduled arrival of product from Asia.
And we've estimated that the impact of late arriving product negatively affected sales by about $30 million and the fourth quarter.
Turning to page seven and and our adjusted P&L for the fourth quarter.
While sales were down versus last year, as I mentioned and the profitability of our sales increased significantly with our gross margin increasing by 460 basis points to 47, 1%.
This represented record quarterly gross margin performance.
So despite sales to decreasing over $100 million gross profit dollars were roughly comparable with a year ago.
This increased gross margin rate was driven by the strength of our product offering improved price realization, which was the result of more effective marketing and promotion and our focus on inventory management, including good progress and reducing excess inventory.
Royalty income declined about $1 million versus last year, largely due to the timing of shipments of spring seasonal goods, which shifted from the fourth quarter last year and to first quarter 2021.
And late arriving product.
Adjusted SG&A increased 5% to $327 million.
We partially restored certain compensation provisions, which had been suspended earlier in the year for the fourth quarter reflected some element of catch up for these expenses our employees did great work this past year managing through very difficult circumstances.
As we rationalized our promotional activity in Q4, we reinvested some of the some of those savings and the marketing specifically of digital media, which delivered good returns.
We also made several investments to strengthen our ecommerce and omni channel capabilities, including the launch of a new mobile app enhancing our website excuse me and continued investment and improving the speed and efficiency of our distribution center, which supports the e-commerce.
We believe these investments will strengthen our capabilities long term and help us as the business recovers from the pandemic.
Adjusted operating income was $145 million compared to $162 million and the fourth quarter of 2019, and adjusted operating margin was 14, 7% comparable to last year.
Below the line net interest expense of $15 million up from $9 million and the prior period due to the $500 million and new senior notes, we issued and the second quarter.
We had of $2 million foreign currency gain and the fourth quarter and our effective tax rate was approximately 18% down from about 19% last year.
On the bottom line adjusted EPS was $2.46 down 12% compared to $2 91 and 2019.
Moving to page eight with some balance sheet and cash flow of highlights our balance sheet and liquidity remained very strong.
Total liquidity at the end of the fourth quarter was approximately $1 8 billion with $1 $1 billion of cash on hand, and virtually all of the borrowing capacity under our $750 million credit facility available to us.
Quarter, and net inventories were up 1% to $599 million.
While largely comparable to last year and total of the composition of our inventory was very different because of our decisions to proactively curtail inventory earlier in the year, our inventory levels and our stores and for the core Carter's brand at wholesale were meaningfully lower than a year ago.
Our exclusive brand inventories were generally higher at year end.
Total year end inventories were down year over year of when considering the inventory from summer 2020, which we packed and held earlier in the year as the pandemic unfolded.
And we made good progress selling through this pack and hold inventory during the year and expect to sell the remaining balance as we move through the first half of 2021.
We also made good progress, reducing our overall level of excess inventory during the fourth quarter.
Our Q4 accounts receivable balance declined 26 per cent compared to the prior year, principally due to lower wholesale sales.
Accounts payable increased by $290 million to $472 million, which reflects the extension of payment terms and rent deferrals.
Long term debt was nearly $1 billion up from roughly $600 million at the end of last year.
This increase reflects our successful senior notes issuance of this past may.
And full repayment of outstanding revolver borrowings and the third quarter.
Operating cash flow and 2020 increased by about 200 million of $590 million.
Our strong focus on working capital and management of spending enabled us to achieve this record performance despite lower earnings in 2020.
Note that while we are planning higher earnings in 2021 operating cash flow is expected to be lower this year due to the repayment of deferred rent and adjustments to some vendor payment terms.
Moving to page nine of the summary of our adjusted full year performance, while 2020 sales and earnings were of course meaningfully affected by the pandemic. The combination of our strong product offering marketing inventory management and productivity initiatives enabled us to minimize the overall profit impact of lower sales.
And with demand so uncertain, we made the choice early on in 2020 to focus more on profitability and then on sales.
The effectiveness of our initiatives is most evident and looking at the difference in our performance between the first and second halves of the year, which we have summarized on page 10.
The first half sales were significantly affected by our retail stores were closed for much of the second quarter and shipments to many of our wholesale customers were suspended while their own stores were closed.
Gross margin performance with starkly different between the first and second half and the first half of our gross margin declined by 350 basis points and part due to taking higher provisions for excess inventory.
And the second half we achieved record gross margin as a result of improving our realized pricing and making good progress on clearing through that excess inventory.
Profitability, followed this gross margin performance with a much smaller decline and adjusted operating income in the second half with and expansion of our adjusted operating margin versus the decline and the first half.
Turning to page 12 of the summary of our business segment performance and the fourth quarter.
And the largest part of our business U S. Retail, we improved profitability significantly despite the decline and total sales driven by improved product margin and good growth and our high margin E Commerce business <unk>.
Stability and U S wholesale and international declined with sales lower and was more difficult to leverage costs and these businesses.
The increase and corporate expenses was largely due to the additional provisions for compensation and to a lesser extent from spending on external consulting and the quarter.
Now turning to page 13, with some detail on your on U S retail performance and the fourth quarter.
Total segment sales declined 6% compared to last year total comparable sales declined 9%, reflecting strong e-commerce growth and lower store sales.
Q4 traffic, while down meaningfully versus a year ago came in ahead of our expectations and was better than the apparel industry benchmark, which we follow.
The adjusted operating margin of our U S. Retail segment improved by 280 basis points to 19, 1% driven by higher product margins as a result of improved price realization and lower product costs and lower inventory provisions.
The gains were partially offset by investments to strengthen our e-commerce business and the timing of compensation provisions.
Moving to page 14, with an update on our omni channel initiatives our investments in recent years to build our omni channel capabilities are clearly paying off the ability to pair our leading E. Commerce website with our nationwide network of stores is a strong competitive advantage as shown in this and the chart here, we saw strong year over year growth and omni channel demand and.
And the fourth quarter.
We believe these capabilities provide a better experience for our customers in terms of convenience and flexibility and shorter click to consumer times.
Our store based fulfillment options also generally provide better economics compared to traditional fulfillment from our distribution center.
Lastly, our ship to store and pick up and store options have driven significant traffic to our stores accounting for $1 7 million store visits and 2020.
About 25% of the time customers picking up their online orders made of incremental purchases while in the store.
Moving to page 15, and some of our recent marketing fourth quarter marked the arrival of the first babies conceived during COVID-19.
While 2020, certainly provided its share of stress and negative news there is no happier occasion, and the arrival of the new baby.
With the spirit and we launched the new digital brand campaign called Hello, optimism and declared these new babies to be part of generation optimism Kantar.
The campaign featured real families and their babies born in 2020.
The campaign has generated an overwhelmingly positive response, which drove gains and brand awareness brand favorability and future purchase intent with customers, while introducing Carter's the number one most trusted baby brand to a new audience of parents.
On page 16, we continue to innovate and our marketing and the fourth quarter and leaned into emotionally driven digital experiences for families such as our virtual visits with Santa and virtual P. J parties with Leslie <unk> junior at the start of Hamilton.
The millennial parents have responded well to these digital offers as Mike said, we added 1 million new online customers and 2020.
These brand storytelling and customer engagement efforts resulted in a record 8 billion media impressions across the year of significant increase over 2019.
Overall Carter's continues to enjoy the highest level of engagement on social media among all the other major players and the young children's apparel market.
Turning to page 17, we continue our efforts to expand the reach of our brands to more diverse consumers, which reflects our company's broader focus on diversity and inclusion.
And to celebrate the wonderful legacies of historically black colleges and universities and to inspire the next generation. We recently launched and HBC, you apparel collection and partnering with a series of HBC you alumni Influencers.
We also partnered with sisters, Uptown bookstore, and New York City on a black history month reading series, highlighting historical black figures and their notable contributions to our country and society.
Moving to page 18, and with a recap of the U S wholesale results for the fourth quarter net.
Net sales were $290 million compared to $349 million a year ago. Despite the late arriving product, we largely achieved our sales forecast and wholesale for the quarter.
Sales of the Carter's brand and sales and the off price channel were each down about 40% tracking with our reduced the inventory positions and these parts of the business.
We are planning for good growth of sales and the core Carter's brand in 2021.
With regard to the off price channel sales, we made much greater use of our own retail stores and the past year to clear excess inventory at higher recovery rates than we've been historically achieved in the off price channel.
Online demand for our brands through our wholesale customers was strong and in the fourth quarter with growth of 36% over the prior year.
U S. Wholesale adjusted segment income was $54 million and the fourth quarter compared to $67 million a year ago.
Adjusted segment margin declined 60 basis points, reflecting higher compensation and marketing expenses that were offset in part by lower inventory related charges and lower bad debt expense.
On page 19, we've included a photo from calls which is one of our largest and longest tenured wholesale customers. Our Carter's baby shop at calls continue to provide a competitive advantage, which elevates the presence of our brand and the customer shopping experience.
The basics of assortment drove strong sales increases all season of customer stock and stocked up on these must have basics. This product is shown here and the front aisle of the Carter's shop.
On pages 20 through 22, we've included a few slides that highlight our exclusive brands, which are available at target Walmart and Amazon.
And these brands had a terrific 2020 and that momentum continued into the fourth quarter were collectively sales of the exclusive brands increased 13% over 2019.
On page 20, we worked with target to create a special presentation of Valentine's day product as one way to help consumers looking for a small way to celebrate during this time.
Celebrating special holiday is an important focus of the justify and new brand with beautiful product and compelling brand presentation year round.
On page 21, we have detected some of the beautiful child of mine product carried at Walmart, we've seen of significant we've seen significant growth of the child of mine brand online with Walmart over the past year, we partnered with Walmart and the use of our photography and brand assets to ensure a compelling presentation of the child of mine brand on the Walmart website.
Yes.
And the next page simple joys on Amazon continues to be a good source of growth for us and 2020, we expanded our product offering and key categories and added incremental categories, such as outerwear robes and sleep bags.
Pictured here is our latest brand store featuring a range of products, including our two waves of sleep and play swimwear and playwear for newborns to toddlers.
Moving to page 23, and our fourth quarter results for our international segment.
International net sales declined 13% to of $114 million we.
And we saw significant disruption and our Canadian and Mexican stores in the fourth quarter as many stores were closed due to the pandemic and these markets are.
Online demand and Canada was very strong with e-commerce comps up nearly 50%.
As Mike mentioned, the disruption and our international partners business continued in the fourth quarter, but we're planning for a rebound and that's part of our business in 2021.
International adjusted operating margin was 13, 3% compared to 16, 2% of year ago. This decline reflects deleverage of store expenses due to lower store sales e-commerce investments and the catch up of compensation provisions offset by lower inventory costs.
And the next day page pages, beginning on page 25, we've summarized some of our thoughts on our strategic positioning and the industry and the growth we're targeting over the next few years.
We believe the company has a number of strategic advantages and the marketplace you've heard us speak about many of these over the years. Our brand portfolio contains the most established and trusted brands and which from the multiple generations have closed their children.
We are unique and our multichannel business model that broadly of distributes our brands, including through a growing and vibrant direct to consumer business with.
And we've had a long record of strong operating performance and returns including significant cash generation.
On page 26, we summarized our mission and vision and vision clearly our objective is to continue to lead the marketplace.
And with special emphasis on the strategic pillars listed here, leading and e-commerce and continuing to win and baby.
<unk> and expanding globally.
We've recently refreshed our multiyear financial forecast is difficult to predict the future right now with a lot of precision, but we believe good growth is possible over the next several years. We believe we can generate mid single digit growth overall and net sales comprised of low single digit growth and U S. Retail mid single digit growth and U S wholesale and high single digit growth.
And our international segment.
We believe profitability can grow faster than sales as we continue to pursue our transformation and productivity agenda. So our target for operating income is and the low double digit growth range.
We believe our anticipated significant cash generation provides us an opportunity to augment operating income growth through debt paydown and the resumption of share repurchases and thereby target EPS growth and the mid teens or.
Our forecasts indicate we will generate substantial cash in the coming years, which provides us significant flexibility to reinvest and the business and pursue alternatives, which includes evaluating M&A opportunities, where appropriate and paying down debt and returning capital to shareholders.
On page 27, and there are a number of elements, which we believe will contribute to our planned growth and sales and earnings over the coming years.
We've summarized some of these here for you I won't read this list, but the good news is the number of factors listed we have multiple meaningful ways to drive growth and our business.
Turning to page 29, and our outlook for 2021, and while there remains significant uncertainty regarding the ongoing impact of COVID-19, We believe we will have good growth and both sales and earnings and 2021.
We're expecting all of our business segments will deliver growth and net sales with our consolidated consolidated net sales growing about 5%.
We're planning for good growth and operating income and operating margin expansion in 2021.
Adjusted EPS is expected to grow about 10% of bit less and what we are planning for operating income growth because of the higher interest costs from the senior notes, we issued last year.
And and assumption of a higher tax rate with more of our income expected to be generated and the United States This year versus overseas.
We expect the first half of the year will be the more meaningful period of sales and earnings growth for a number of reasons, including the comparison to the first half of last year with the initial pandemic disruptions as.
And as well as various timing differences between the years and wholesale shipments and spending.
We won't match 2000, Twenty's record year of cash generation as we repay deferred rent and have other changes in working capital, we'd expect 2022 to be a more normal year of significant operating and free cash flow generation.
We're cautious and conservative and our planning assumptions given the continued uncertainty which exists. This posture has served us well over time.
In terms of the first quarter, we expect sales will be comparable to last year.
And we do expect first quarter profitability will increase significantly with operating income and the neighborhood of nine of $30 million and.
And adjusted EPS of approximately <unk> 25, compared to losses a year ago.
In terms of key risks, we continue to monitor the status of later, writing product across our various channel and the potential impact of these delays may have on the sales of spring product.
Also we are seeing and ongoing escalation of transportation costs and the marketplace, which may result in additional expense above what we have planned this year.
With these remarks ready to take your questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you will using a speaker phone. Please make sure. Your mute function. The is turned off please signal to reach our equipment again price.
The one to ask a question, we'll pause for just a brief moment to allow everyone an opportunity to signal for questions.
We will now take our first question from Paul the way.
Okay.
Yeah.
Hi, good morning.
I do apologize and we have Ike of virtual of Wells Fargo. Please go ahead.
Good morning.
Hey, Mike how are you.
I guess I'll ask two one for Mike one for Richard.
Mike there's been lots of media and editorial but the birth rate.
Totally appreciate it.
What your comments are around you've grown your business despite.
Headwind on the birth rate the last several years, but it just seems like there is a much more pronounced decline and the birth rate can you just kind of talk about maybe how that might impact your business not longer term and of course, but maybe over the next 12 plus months have you seen anything and your zero to two category.
And the kind of related to that and then Richard is it possible. The this dig in a little bit more on the Q1 revenue guidance.
Is it wholesale is at retail of the E Commerce, normalizing and just I'm, having a little trouble trying to kind of see why youre revenue wouldn't be a little bit better and in the first quarter any help would be great.
Sure so.
And with respect to the to the burst we have not to date seen any meaningful change and the performance of our baby business keep in mind.
The very high percentage of our business with Walmart Amazon and target is focused on baby and that's been the strength of our business. This past year online demand for our baby apparel has been terrific that that said the antennas up on this over the years over many years, we've seen a correlation between.
Strength of the economy and impact on birth rates and we've all known people and this past year and our family of friends of delayed marriages and when you delay marriages more often than not your delay delaying starting a family. So so we're keeping an eye on the best information we have is.
So there might be.
300000 of 500000 fewer children born in the United States. This year, it's not going to happen on January one, but at some point during the course of this year, we may see fewer berson.
Our best analysis would suggest typically of family will spend some portion of about $700 on the on.
And a newborn child and that first year or so.
$700 per child on that range of three hundreds of 500000 and fewer burst of.
Potential exposure for the market of some portion of 200 $200 million to $350 million, we own a third of the newborn markets say that zero to 10 year old child, we own a third of that market. So for us for us. It's some portion of $70 million to $100 million revenue exposure again, if that all happened on January <unk>.
<unk>, which alone and so anyway, we're going to keep an eye on it with every quarterly call. We'll update you on what we're seeing but to date, we haven't seen any meaningful change and the performance of our baby product.
Because of that exposure I actually say little baby basics, which is the core core of our Carter's brand.
Particularly and the baby space Theres, not theres not the more beautiful and the market that are a little baby basics I would say thats, probably the best performance. We've had this past year and probably three or more years. So that so we'll look to update you as we go through the year, our mindful of Thats and exposure that's been taken into consideration and the guidance that Richards of sharing with you. This morning.
And we'll we'll see see what impact if any of that has on us and the balance of the year.
And I would say on first quarter revenue I would say our ambitions had had been higher until recently and it's really the effect of these product.
Product delays that have caused us to be a bit more modest we are planning I would say for some slight growth and wholesale and in our U S. Retail business stores are planned down and the U S and E. Commerce is planned up and in the first quarter and right now we have international planned down we still have significant store closures and Canada, we still have some stores closing and Mexico. So those are kind of the build.
Blocks, a lot will have to do if we start to see a better trend on the arrival of product and perhaps we could have some additional <unk>.
<unk>, particularly in wholesale but right now we're being we're being conservative on that.
Thanks, guys very helpful.
Youre welcome Mike.
Thank you, ladies and gentlemen, if you find out of your questions have been answered you may remove yourself from the queue by pressing star two and once again. It is star one to ask the question. We will now take our next question from Paul <unk> of Citi. Please go ahead.
Hi, guys.
This is Kelly crago on for Paul Good morning, and Kelly.
Good morning.
Question on your sales.
Sales transfer on your.
Closed stores.
Number one where do you think of that.
The sales of legato is it the other Carter's stores it is at the online.
Is it to your wholesale accounts and what have you seen in the past and then just the second question is.
Around the competitive landscape how is it from the promotional impact and that will take the spring.
And so a couple of thanks, Kelly I think.
Terms of store transfer, we've experienced debt transfer and the low twenty's, 20% to 25% transfer we've got good data on that and Thats transfer within our retail channel So our stores and our online business and we've seen it in and both we do a good job marketing to those customers and making sure. They know the next closest store and of course driving our online.
So I'd.
And I'd say, we plant, probably 25% transfer rate on that and that's and the direct channel space in terms of promotional environment.
We've been less promotional and we walk back and effective promotions, we really focused on our loyalty program and our and our Carter's credit card and like the marketing team has done a really good job of increasing the brand and emotional content and all of our consumer marketing.
And from <unk>.
Promotion of two emotion and really focusing on the motion. So we feel good about that I think.
If you look back in Q4, I would say that at least the folks that we sell to that the.
Wholesalers were less promotional inventories are low and the channel everybody. We sell two excellent excellence more inventory right now so I think folks are doing a good job managing their business.
Price realization and higher margins as we've all played the tight and conservative given.
Given the uncertainties.
And Kelly one thing I would just share with you on these store closures nearly all of these store closures are being done upon lease exploration because we've been and the centers for 10 years, we have been following the traffic patterns and increasingly we're analyzing to what extent are support our stores support e-commerce customers. So we're looking at these armed.
The channel sales what percentage of our customers are opting to pick up their online purchases. The same day of the store located closer to their homes. So after 10 years and the center when the lease comes up for renewal and increasingly we're saying listen there are better opportunities available to us and adjacent market. So.
Substantially all of these of.
Closures are at the end of a 10 year lease and we're just opting to to exit as opposed to reinvest into a center, where the co tenancy has changed the traffic patterns have changed and.
And so.
And we see better opportunities to open and <unk>.
Jason markets.
Got it thanks, and just quickly follow up on the question around the sales assumptions and <unk> I guess.
Why would still be flat and <unk> with March being the easiest comparison and I think you mentioned net.
Net sales were positive in January and actually what you said about February but just is that is it related to the supply chain disruptions and any way to quantify that and how long do you think that will continue.
And.
While March is of significant month Kelly. So we typically look forward to March it's bigger than January and February combined I would say the.
The product delay disruptions have been acute and wholesale and as we get closer to the month of March I think some issues have have emerged and retail were just a bit more cautious about what may be on hand, and particularly in the stores, we're probably in a bit better shape to do the business online at this point.
Got it thank you.
Okay.
Thank you we will now take our next question from Susan Anderson of B Riley. Please go ahead.
Hi, good morning, and.
I guess, just looking at gross margin and SG&A per first quarter and.
Can you maybe just it sounds like you expect gross margin to be up.
And I'm curious how much the supply chain issues is going to cause some pressure there if at all and then also and the SG&A are you still expecting that to be pressured and first quarter of like fourth quarter. Thanks.
I'd say on.
On SG&A, we are expecting SG&A to be up slightly and won't it won't be up at the same the same level as we found and the fourth quarter, we are continuing to.
And to make our investments you do have I would say a more normal pattern of accruing expenses across the year, where we were suspending.
<unk> of last year, and just given as the pandemic started to become evident and we started to turn things off and I think you'll see a more typical accrual of expenses, including for things like like performance based compensation.
Gross margin, we are planning for our I'd say nice expansion of gross and gross margin and the first quarter recall last year and the first quarter. We took the substantial charges for excess inventory and just that the merit of the fact that we're not tech that we're comparing against those charges I think will help gross margin and we're also expecting and we'll continue to make progress on pricing.
We're also going to have project progress, we believe on product cost so that should the should all be benefits to the gross margin.
Okay, Great. That's helpful. And then if I could just add a follow up just looking at the five year of topline and the EBIT goals that you laid out and I think that gets you may be just doing the quick math two of low teens ebay and I think historically you had always talked about of 14%. So just curious if anything's changed there that changes.
That goal longer term such as the mix shift to some of these other channel. Thanks.
And our best outlook would suggest were our latest models. Those are focused on of 13% operating margin will have a higher mix of E. Commerce sales, which is our highest margin business will have a lower mix of lower margin stores and.
And we expect to make continued progress on on the price realization through a stronger product offering more effective marketing.
Inventory management, so we've got some good initiatives.
This is we're trying to be cautious given the things we don't know this year, but the trend and our business both in sales and profitability is up.
Okay that sounds great. Thanks, so much like the CR.
Thanks, Susan.
Okay.
Thank you we will now take our next question of Jay sole from UBS. Please go ahead.
Great. Thank you so much.
Maybe Richard just wanted and wondering if you can elaborate a little bit on the full year guidance.
And just given the <unk> this year should be pretty well above point of view last year and took you probably should be dissimilar story because of the compares are obviously very easy.
The full year guide sort of implies that the back half of the year will be significantly below <unk>.
And 2020, just wondering sort of what are the components. You know you mentioned the birth rate.
And Mike mentioned the birth rate what are some other factors that are sort of implied in that back half guidance for this year.
Well I don't think we were specific on the back half guidance first of all Jay and that was that intentional. We're so early in the year and there is still so much uncertainty that I think we have to provide for some degrees of freedom here that the year may play out a bit differently than we have the planned I think certainly the first half as we sat and the remarks. This morning is expected to be the bigger source of revenue.
And earnings growth and that does track very directly to the disruption a year ago. When the stores were closed we are up against significant e-commerce comps here and the first half I would say it was it was a bit later in the year, though when we started to make some of the more fundamental changes to our promotional strategy. So you saw the the big gross margin gains.
And we achieved and in the second half of the year. So from a pure comparison point of view, we're certainly hoping of the stores are going to be open all year that would be of benefit and we're hoping.
The net wholesale rebounds that certainly and in first half and some of that would accrete of second half. The are there are a lot of timing differences that I think we're going to have to point out as we move through the year 2020 was an unusual year in terms of things coming and going and the P&L and I think 'twenty, one is going to be a bit of a mirror of that so.
It's a tough year to plan.
There are going to be differences and timing for instance of wholesale shipments of little baby basics for instance, which is the significant launch for us at wholesale was the second half of that last year and that will and if it proceeds on its more normal timing will.
And we'll be it will be more of a first half activity. So theres going to be lots of puts and takes between between the periods and we'll do our best to lay that out for you, but I wouldnt say that were necessarily pessimistic about the second half and I think we're going to have a much better line of sight here as the months unfold the.
Full deliveries too were pushed to the right because stores start to reopen in June and usually we're shipping fall deliveries beginning in May and fall is the biggest part of our year and some of those deliveries.
We'll begin in the first half of this year versus second half last year, one thing I would add Jay just would be that our announced store closures do affect the second half as it relates to planned revenue. So theres 100, some stores that were closing most of the store closings are weighted towards the first half of those sorts of will be out of the base for per second.
Got it understood that's helpful and maybe one more question from me just on the highest income excuse me of high single digit international growth.
Forecast over the long term within long term guidance, you mentioned, Canada, Mexico, and Amazon and growing internationally can you maybe give us some idea of what that Amazon piece might be and Tonight and what about China. At this point is there any update on sort of the the progress to reset that market.
Yes.
We're expecting the internet with very good growth of international I would say 60% of that growth.
We will be driven by Canada and.
And Mexico, those businesses performed extremely well.
Last year, particularly in the fourth quarter. Despite a lot of store closures about 30% of the growth and international come from.
The wholesale.
Including including Amazon and the other multinational retailers the and these partners. We've got bookings for the second half of this year from those smaller retail retailers throughout the world.
It has historically been a very good margin wholesale business force of 30% from wholesale and the balance from Skip hop International.
The Amazon business, we're expecting very good growth.
Business is off to a very good start we've had a partner in Europe for years.
And online partner in Europe.
For years, and I would say the growth has been okay. It hasnt been significant and the short amount of time, we've been doing business with Amazon and their launch of simple joys into Europe. The performance with the Amazon has far surpassed that other other partner that we've had for better part of the last five or more years. So we're expecting very good growth with Amazon and.
And the international over the next five years.
Got it thank.
Thank you Michael.
Youre welcome.
Thank you there are no further questions at this time I would like to turn the conference back over to Mr. Casey for any additional or closing remarks. Thank you.
Okay, well. Thank you all very much for joining us.
Joining us this morning, we're going to update you again in about eight weeks. So by that time, we'll have March behind us. It's the largest month that we have and the first half of the year and we'll have a good sense for just how the year is.
Getting underway and how we're overcoming some of these transportation delays from from Asia.
So we look forward to update you again.
Until then goodbye everybody take care of the stay safe Bye bye.
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