Q1 2021 Carter's Inc Earnings Call
Okay.
And Chief Executive Officer, Richard Westenberger, Executive Vice President and Chief Financial Officer, Brian Lynch, President and Sean Mchugh, Vice President and Treasurer.
Today's prepared remarks, we will take questions could come along on.
<unk> issued its first quarter 2021 unfortunately scaling of this morning, a copy of the day to each kind of presentation materials for today's call have been posted on the Investor Relations section of the company's fault zone at.
I saw that others dotcom.
And in the company's presentation materials walk of company's outlooks from future performance are forward looking statements.
Actual results may differ materially from those projected cause.
Cause of discussion of factors that could cause actual results of bank of making claims in the forward looking statements. Please refer to the company's most recent and most importantly of course all of you.
With the Securities and Exchange Commission kind of presentation COVID-19 exposure on the company's website.
On this call with the company of license there is one GAAP financial measurements a reconciliation of these non-GAAP financial measurements. She could talk financial measurements is provided in the company's earnings release, which can be completion of genius.
I'm, sorry, two day conference being reported.
One of them I think it was a conference of other keeping circulation.
Good morning, everyone. Thank you for joining us on this call.
Before I walk you through the presentation on our website like of certain parts of our business with you.
Part of this is off to a very good start to share first quarter sales and earnings are meaningfully better than we had planned with growth in each of our retail wholesale and cash.
Sales segments.
We saw a surge in demand for our brands embarks on the weeks, leading up to Easter with consumers responding very positively to the strength of our product offerings and compelling value proposition.
Also breathing of realizing significant benefits from it.
Yeah.
Government stimulus supporting families with young children.
Frankly, the benefits from the one.
Trillions of dollars stimulus package will continue their summer providing families as much as $300 a month for children under the age of six and the <unk>.
Second this year.
Much of $8000 of taxpayer.
It's from childcare next year.
With continued progress with destinations.
We may see a more meaningful recovery from the pandemic this year.
Currently we have raised our sales and earnings forecasts from <unk>.
'twenty one.
In terms of sales trends, we got off to a good start on share with strong demand for our new spring product offerings, you walk around in February of winter storms in important markets, including Texas.
Sales in March were significantly better than free on this.
Given the seasonality of our business our sales in March or more of in January and February sales combined it's typically the largest market sales and earnings contribution in the first day of our year.
Sales in March were up nearly 60 per cent compared to last year, who was the strongest demand in March we have seen in the past five years.
Our second quarter sales are also off to a good start as warmer weather can change to arrive.
What parts of the country and consumers are more comfortable getting out to shop.
Despite lingering COVID-19 related restrictions and so on good demand for our brands over the Easter holiday shopping period.
Last year all of our stores were closed in the United States in the weeks leading up to Easter.
On a more meaningful comparison is to Easter in 2019.
Compare to the Easter holiday shopping period of 2019, our retail sales were up 10% driven by strong demand for point of where the earnings on those sales were up over 30% driven by improved price realization.
On our retail turned on for.
Largest contributors of our first per sales and earnings income.
Of course continues to be on.
From a highest margin business.
Recall that we began to see of searching online demand of March last year at store.
<unk> closed in early phases of the pandemic.
From the first quarter. This year e-commerce penetration grew to 40% of our retail sales up from 37% last year from 30% in 2019.
Over the years, we've been investing significantly in the online experience for our brands.
The presentation of our.
Current offerings search capabilities site navigation ease of alpha.
What city of checkout.
We've expanded our online product offering per share with new brands and product assortment that appeal to a broader group of consumers, including organic apparel and between market.
We've also invested in omni channel capabilities that leverage of our stores in the United States and now Canada to provide a higher level of service and convenience for our online customers.
We're seeing the benefits from those investments in our very profitable E Commerce business.
Increasingly we are seeing on past first enjoy the convenience of shopping online and then picking up their purchases of our stores located near their house.
In the first quarter, we saw a 32% of increase in customers using our omni channel services.
Allow me to share with customers of our highest volume customers. They shop more frequently and spend nearly three times more than our single channel customers last.
Last year, we leveraged over 600 of our stores in the United States to fulfill online purchases.
As a result, we improved the speed of delivery and earned a higher margin relative to shipping from our distribution center.
Going forward, we're focused on fewer better higher margin stores, we plan to close over 100 low margin stores upon lease exploration this year.
Secondly, driving consumers to our websites and higher margin store first of all of them.
Payers are more densely populated areas.
So we'll continue to be an important part of our brand experience over 60% of children's apparel in the United States and Canada is purchased in stores.
In the post pandemic period, we believe there will be new on attractive real estate opportunities, which may enable us to revisit per store opening plan.
Our current plan envisions only 10 store openings of you're getting.
Next year.
Our wholesale channel.
What was the second largest contributor to our first quarter sales on profitability collectively we continued to see double digit growth with our exclusive brands. We also saw good growth of our flagship Carter's brand, let's skip hop brands, each with double digit growth on wholesale sales from the first quarter.
E Commerce sales through our wholesale customers continued to be robust as of quarter over 60%.
In the first quarter, we saw a double digit percentage growth in baby apparel sales of our wholesale customers relative to last year.
High percentage of our exclusive brands with target Walmart and Amazon are focused on baby apparel.
The latest market data suggests 7% fewer babies are born year over year through February.
That said, we have not yet seen any meaningful impact on our baby apparel sales baby apparel is the largest component of our sales growth in the first quarter.
Interestingly, our Carter's printer sales kind of skip hop timeshare sales are also trending much better than a year ago.
We are of a walk of supplier of baby apparel from the largest retailers in North America, Inc.
It's a prolonged slowdown in birth during the pandemic.
It's either on our results.
As we move through the balance of the year. It will be interesting to see the impact of of new stimulus package, which supports of families with young children.
Despite the decline in annual births over the past decade, we've managed to grow and gain market share.
The broadest distribution.
On to apparel in North America wherever consumers are shopping for their beautiful new babies will likely be of strong presentation of our brands.
We also saw good growth in on top of her in for 2014 type of hospital operators, including Sleepwear Swimwear and playwear.
Thankfully with broader access of acceptance of the vaccine more schools are reopening of the final months of its weighted here yeah. We believe we're benefiting from that.
What sort of trend.
For the year, we're forecasting growth of nine of our top 10 wholesale customers.
Play on to watch on new baby apparel and of our fall product offerings in the second quarter of this year.
With many stores closed in early day, the pandemic nearly $50 million of our initial total product watch it shifted into the third quarter last year.
Sure fair and timing of product launches of the only as of year over year of comparability of our quarterly results this year sort of.
Yeah, we're expecting good double digit percentage growth in sales.
Sales of T M.
Profitability.
Sales in our international segment grew nearly 12.
On a per second quarter, our operations in Canada, and Mexico type of very good growth despite COVID-19 related store closures.
E Commerce sales through our international segment more than doubled.
Canada, and Amazon's launch of our simple, Georgia brand in Europe last year were the largest contributors to that growth.
For the year, we're expecting.
Good recovery of international demand for our brands, Canada, and Mexico are still challenged part of the limited access to the vaccine and subject to COVID-19 related store closures.
Assuming current Lockdowns in Ontario, Quebec City of certain markets of Mexico are short lived we are forecasting double digit percentage of sales growth in Canada and Mexico.
There's also a forecast of a strong recovery of approach this year with international.
Zero customers, representing our brands in over 90 countries with a day.
The highly margin accretive component of our business.
The drivers of our growth in international markets and create new omni channel capabilities, Washington kicked off earlier this year.
Sales in Canada are responding very positively from the convenience of shopping online and picking up their purchases in our stores.
Our largest specialty retailer of children's apparel.
With more than three times per share of our nearest competitor.
In Mexico, we plan to replicate the success, we've achieved through our co branded store model in the United States Canada.
Over the next five years, we plan to convert all of our stores in Mexico to the co branded model.
Extra also of Washington, ecommerce capabilities last year and sort of throughput start.
Than we had planned.
We're forecasting good international growth with our branches so globally.
He was on Walmart and Costco.
Simple joys brands sold through Amazon is expected to be of a meaningful source of growth for us of in years ahead.
Our wholesale relationships with retailers in Brazil hasn't been of waste are also expected to be good contributors to our growth.
With respect of our supply chain, we continue to be challenged by two to three week delays of the receipt of product from Asia sort of macro challenge affecting many retailers.
In general of the timeliness of receipts from Asia has not improved relative to the fourth quarter.
Our suppliers of Asia has struggled to meet our shipping deadlines as infections from the Corona virus.
Right.
<unk> access to the vaccine.
As a result, we expect late deliveries may continue in the balance of the year and we've reflected that in our forecasts.
To mitigate that exposure, we are expediting to work this out of higher cost to the extent possible. We are also moving production from schedule, which helped to mitigate the pandemic related delays in Asia.
West Coast ports.
Frankly, our wholesale customers are lean on inventories and seeing good bidding on for our brands today, we have not seen.
Any meaningful order cancellations due to late deliveries.
Most of the unusual.
Because of a surge in demand of the United States, where the market began to recover last summer from carriers have raised their prices.
Higher distributions from hospitals.
Our being more than offset by better sell throughs of our product offerings fewer promotions on price realization and margins.
In summary, 2041 of the Doctor Good start we're seeing strong demand for our brands, we're leaner on inventory been chasing demand.
We're also to income.
All of the carbon we believe on the strength of our product offerings benefit from government stimulus supporting families with young children.
With that information, enabling more children to return to school.
Of the benefits from our productivity initiatives.
Congress continues to day with best in class of young children's apparel last year, an independent study of cars online shopping experience one of the basket from the United States.
Yeah.
Earlier this year of a separate study ranked cars. It's one of the best lots of brands in the United States.
We continue to lead the market because of the strength of our brands unparalleled mark with distribution of over 19000 store locations.
Nearly 20000 employees worldwide working to provide the best value and experience maybe on.
Children's apparel.
A lot of thank all of our employees, who enabled a strong start to our year and their commitment to achieve our growth objectives. This year.
Yeah.
First of all and I'll walk you through the presentation on our website.
Thank you Mike Good morning, everyone I'll begin on page two of our GAAP income statement for the first quarter.
Net sales were 788.
$1 of 20% from last year reported operating income of 127 of $9 compared to a loss of $78 million a year ago.
And reported EPS of a dollar amount of effect compared to a loss per diluted share of $1 eight of two a year ago.
Because of last year's reported results instead of the adverse effects of the early days of of the pandemic, including store closures, which began in mid March.
The suspension of shipments to many of our wholesale customers.
April inventory charges and impairment charges related to goodwill and intangible assets.
Our first quarter results for 2021, and 2020 included unusual items, which are summarized on page three.
We've treated these items of non-GAAP adjustments to our reported results to enable greater comparability and provide out of play into the underlying performance of that but it does not.
Our remarks today will take care of golf on an adjusted basis, which excludes unusual items.
Turning to page four for a summary of highlight sort of first quarter of Black Knight as we delivered an exceptional quarter.
Demand for our brands was very strong as consumers responded very well from our spring product offerings and meaningfully exceeded our sales and earnings objectives for the first quarter.
We achieved a record gross margin and managed spending while enabling our reported operating margin of what were 16% of our best quarterly performance in how we're on a decade.
In addition to our strong product offering we believe that graph what spurred by a number of other factors.
Including warmer weather in the weeks, leading up to Easter benefit of government stimulus.
Using of COVID-19 related restrictions progress of vaccinations around the country on the return of in person learning.
Better inventory management on a kind of price realizations were also key contributors to our growth in the quarter.
While we were pleased with our growth over 2020 of Pops on meaningful to them out of we exceeded our first quarter of 2000 19000 earnings performance as well.
Moving to page five on our adjusted P&L for the first quarter.
While net sales grew 20% of of last year gross profit dollars for 72 per cent in the quarter.
Talking about gross margin rate expanding on nearly 1500 basis points to 49, 8%.
While several factors contributed to this record gross margin in the quarter.
Meaningful where improved price realization driven by the strength of our spring product offerings and improved marketing and promotional effectiveness.
Significantly lower inventory charges compared to last year's first quarter.
On a top problems of lower versus last year.
Royalty income was roughly comparable to last year of $7 million.
Adjusted SG&A increased 3% to $271 million, which was a little lighter than the other plants. Some of this favorability will ship forward now and gets back up of the balance of the year.
SG&A leverage of 560 basis points to 34, 4% of sales as a result from the strong sales throughout the end of the quarter.
Quarter included higher spending.
He ran from putting investments in our retail on supply chain capability.
Furthering our ongoing productivity agenda.
Without some sort of higher compensation expense every type of person.
On a year ago lower days expenses in response to the initial out of type of business and the pace of the pandemic.
Adjusted operating income of $129 million compared to an adjusted loss of <unk> million dollars in the first quarter of last year.
Adjusted operating loss of 16, 3%, which was the best performance in a number of years as we've noted.
The love of line net interest expense of $15 million up from $8 million last year due to the $500 million of senior notes we issued.
We took steps in Q2 last year, the strength and liquidity.
We had a small part in terms of gain on the first quarter compared to a $5 million of FX loss last year.
Our effective tax rate was approximately 24%.
From about 14% of Q1 of last year.
We're expecting our effective tax rate this year will be higher than last as a REIT.
All of a higher proportion.
Income being generated in the last parts of wherever space and on.
Forecast of higher compensation expense of some portion of which will be non deductible for tax purposes.
On the bottom line adjusted EPS of $1 98 top of meaningfully compared to last year's adjusted loss per share of any one time.
We're gonna of sexual from balance sheet and cash flow of highlights our balance sheet on liquidity remained very strong total liquidity at the end of the first quarter of approximately $1.8 million.
But the other one belt from Arthur.
Cash on hand, and essentially all of the borrowing capacity under our $750 million credit facility available to us.
Quarter on net inventories declined 1% to $561 million.
On a gross basis inventories were down 4% versus Q1 of last year.
Inventories at the end of the quarter. We're in good shape on the strong demand we are experiencing and improved inventory management, which has included generally buying less inventory than in previous years.
Over the past year, we've made good progress on reducing lack of inventory and selling through the inventory with half of how in the early months of of the pandemic.
It actually I kind of a bit more inventory right now with like I said, we're experiencing supply chain disruptions, which of delaying product receipts and up on with shipments to our retail channel and wholesale customers.
Disruptions to date had been mostly transportation related however.
However in recent weeks, we began to see from factory delays as covered infections and a number of countries from which we source products reported in Cambodia, Bangladesh and India have risen considerably.
Accounts payable was higher year over year, reflecting on working capital on that stuff.
Putting the assertion of vendor payment terms and rent deferrals implemented last spring in response to the pandemic.
Long term debt was approximately $1 billion down about $200 million from last year. This day.
This reflects lower revolver borrowings, which were offset in part by lost share for issuance of the senior notes.
Cash flow use of operations in the first part of it was $49. It's not unusual for our cash flow to be negative early on here.
In terms of cash through the first part of it was substantially better than what we had planned given our increased profitability in the first quarter.
Lastly, given how our business performed last year during the height of the pandemic.
From starting in 2021, and our outlook for continued strong liquidity.
Presuming on return of capital program.
We announced in today's press release of our board of Directors has approved the resumption of a quarterly dividend at <unk> 45 per share.
Which will be paid at the end of day.
What type of long track record of returning capital to our shareholders presumption of on recurring dividend on our confidence of the outlook for the business and we will continue to evaluate additional opportunities to return capital including share repurchases over time.
He is our line of bikes the recovery of the broader marketplace of improved.
Yeah.
Turning to page eight but it's on many of our business segment performance in the first quarter.
We achieved double digit sales growth on all of our business segments led by year, three Cal with growth of 27 per cent.
We built on our strong sales rep with what's there.
<unk> improved profitability in each of our segments.
Corporate expenses were higher year over year consolidated of higher provisions for compensation, which were significantly curtailed a year ago. During the early days of the pandemic and external consulting and supportive of our productivity initiatives.
Now turning to page nine with some detail on U S retail performance in the first quarter.
What stores and ecommerce net sales cuts of double digit growth over last year.
Given the significant store closures, which began in mid box last year, our usual total retail comparable sales metric is not meaningful this year.
Our ecommerce business continued its momentum building on last years of strong adult with total sales in this channel increasing over 38 per cent.
On the first quarter, we continued to see good momentum with our omni channel offerings on there.
Channel on related sales increase of about 100 per cent compared to Q1 of last year.
In the first quarter, 29% of ecommerce orders were fulfilled by a retail store.
You go through on price.
Or shifting to other customer directly from our store.
From 16% in last year's first quarter and also up from the level of activity on the fourth quarter.
During the first part of of closed 60 stores, which is part of our full year plan to close approximately of 115 stores over the course of 2021.
Given the relatively low productivity of the stores slated for closure and with the benefit of a strong sales transfer rate. We expect these closures to be accretive to earnings and margin in 2021.
The profitability of our U S retail business improved meaningfully in the first quarter from adjusted operating margin of 18, 7% driven by higher gross margin as we improved price realization and had meaningful lower charges for excess inventory.
We love of the fixed cost type of business very well get on the strong increase in sales.
Moving to page 10 of them highlights of recent marketing at the start of the pandemic last year with up to the first of its kind of virtual baby shower protracted problems with Kelly Clarkson.
This event was a huge success of we've made it an annual of that.
Sure from a dominant we created the dream shower get away of that.
We partnered with celebrity name on Ashworth himself and other key partners, including holiday for a day do less of an skip hop to create special price packages for participating months' base.
Yeah sure of something that was also very successful I was hopping on nearly triple the contact countries versus a year ago.
Yeah from new product launches to share with you today on pages 11, and 12, we're very excited about our little planet brand.
Focus on little planet is on sustainability and is positioned as an excess cash as unacceptable premium brand.
Sustainability of the meaningful trend in the marketplace today consumers want to purchase products, which demonstrate high integrity and commitment to the environment.
As such little Planet is also an initiative, which is helping to advance our overall ESG agenda of the company.
We launched a new little planet experience on our website in March with a new caf dedicated to the brand.
These products are mostly organic cotton crop.
Animal, including packaging of hang tags, which accompanied of product.
A lot of time of assortment complements our other brands in terms of its elevated athletic and fashion, while remaining very acceptable and Italia on price.
The product of currently available on our website kind of target.
Got a tremendous response from our marketing efforts supporting little planet, including on social media.
Early results have exceeded our expectations on we've been chasing additional inventory in our best selling styles to meet consumer needs.
On page 13.
Well basically the branding we get applied to a subset of our existing products. We've created a new website experience for customers on a corresponding marketing campaign focused on this core net everyday essentials and a range of optimistic colors.
So kind of class of putting everything from maybe put it P. J the pocket P to easing of dresses and simple price and simple stripes solids and box.
The finish of makes it easy for existing and new customers sort of looking for the simple classic style of quarter of young children.
Turning to page 14 of our marketing has evolved.
Matter of drafts and support our broader H F merchandising initiative.
Marketing has a very new and different look feel and voice, which is more appropriate to the older child and product that is intended to drive.
You'll see more of a between squad oriented marketing in the weeks on lots of kind of them as a result on the momentum of on older age segment of products across our retail and wholesale channel.
I think the theme we have from data, which is familiar to many of you know our strong social media engagement with consumers continued in Q1 of the expanded our community of parents across key social media platforms, including Instagram of Carter's and Oshkosh brand.
And from 71 per cent of all of engagement in the category.
Moving to page 16 of our U S wholesale business.
Net sales growth of wholesale with net sales increasing 12%.
Sales of increase was driven by several components of the business.
Putting it with the brand.
And of course, our Carter's brand, which returned to growth on a quarter.
I hope that works from a higher than we had planned as an experienced from earlier demand from certain customers, which helped offset the impact of delayed product receipts.
It's been outstanding replenishment demand from a number of on customer, especially for our core of little baby basics product.
Our wholesale customers are experiencing high demand for our American care of ours, particularly on line.
Translated into improved sell throughs and realized pricing.
Profitability in the U S. Wholesale segment was also up meaningfully as a result of higher sales and improved product margins.
Our inventory related charges to handle on bad debt expense of Trump.
Partially offset by higher compensation provisions.
Moving to page 17.
Just on your brand of target with very strong in the first quarter. One specific area of strength has been dry swimwear, which was now expanded in infant and toddler sizes to all target doors.
Target customers have responded well to these products with a compelling combination of prints and patterns with great quality and value.
We believe consumers are likely of planning more vacations. This year as it depends on a couple of paid providing good momentum of new sales of these products.
And Walmart report continues to be an area of strength as it is on all of our exclusive brands.
We're also seeing good momentum with the travel on top of our business all of our customers have responded well to the value and style on our childhood mindsets and particular in providing easy outfitting solutions.
Moving to page 18.
A majority of that Congress is our brand exclusively via Amazon on around the world.
Overall sales growth of simple joys continues to be strong.
We participate in a very interesting program of Amazon their registry welcome box, which qualifying card members receive on finding that per antibody baby registry.
We expect to ship over 1 million widebody fleets of Amazon in 2021, which means the number of new customers will be exposed to the simple joys brand if they prefer to pick on parents for the first time.
Kind of patients became the first quarter results for our international segment.
International net sales grew 19% from $97 million on a constant currency basis segment net sales grew 15%.
Canada was the largest contributor to our sales growth.
Yeah.
As of this marketing, 619% over last year online demand was particularly strong with ecommerce sales of over 100%.
While Canadian store sales decline in Q1, because of store closures and first part of the quarter.
Extremely strong consumer demand once the stores we opened in late February.
Apparently we have approximately 100 stores, which are closed again and on Carryout pullback as authority. Then these promises have ran post COVID-19 lockdown.
Expecting tourists will reopen by the end of May.
In Mexico, our second largest international market after Canada net sales grew 9% in the first quarter driven by growth in both ecommerce and store sales.
The balance of our international segment is comprised of wholesale relationships, whatever 40 partners and multinational retailers in approximately 90 countries around the world.
First quarter net sales in this portion of the business increased 26% of Triple net growth with Amazon.
Demand from the skip hop brand outside of the United States.
Adjusted International segment income was $10 million compared to a lot of loss of $5 million last year.
Adjusted segment margin improved from 10, 2% or something better price realization lower inventory provisions and expense leverage.
Our cash 'twenty.
Earlier this month, we relaunched omni channel capabilities in Canada, specifically buy online ship to store.
By online pickup in store and curbside pickup options for consumers.
We're the only children's apparel retailer in Canada to operating efficiently enabled omnichannel capabilities.
We believe will help us to strengthen our leading position in this important market.
On page 21, we've included a photo of our first store in key.
Because historically seeing strong demand from Ukraine on on Europe.
And we're optimistic on that off the ground of potential for this market.
On page 23, the number of question towards the states from investors on ESG topics kind of been increasing in recent years. So we wanted to provide a brief update on our ESG agenda.
First of as shown here, we summarized our core values.
New prostate Carter's these exact statements have been in place from nearly a decade now.
The body of the prominently displayed in all of them.
And on operational facilities and even on those are some of our key suppliers and partners around the world.
All of these are important guidepost for us in how we run the company and they're important to us of individuals as well.
Importantly, the value of our incorporated into our employee performance appraisal process. So all of our people are evaluated against how well the model and adhere to these values.
Our focus on environmental issues continues to develop and like many companies we are on the earlier stages.
All of them on specific goals and objectives in this area.
We worked closely with library of suppliers and partners to understand their own programs and commitments and being good stewards of the environment.
And social matters, we've expanded our dialogue with employees and consumers regarding the importance of diversity and of course, the best and strive to ensure that our employees and business partners throughout the world are treated with of fairness dignity and respect for per deal.
End of last year Carter's has been recognized by Forbes across numerous dimensions.
Being a great company for women and diversity of overall.
Finally, we've always prided ourselves in current and governance matters and how we manage the company overall.
Last year, we appointed an executive leader, who has responsibility for all of our ESG activities.
It's about 40 was spread across several of individuals previously.
They reported directly to Mike.
We intend to publish our first ever ESG report later this quarter and we look forward to hearing your feedback.
On page 24, we have an example of how we are working to reduce the environment.
That's on our products, we recently announced the launch of kit cycle of first of its non program to recycle children's clothing.
In terms of business pilot program is to provide families of sustainable option when its time department their children's Wawa in Carter's and Oshkosh clothing.
But sustainability sustainability benefits of this program of course reduced volumes headed from landfills and of the conversion of dominated items to enter products compete for further years lots of installation.
Moving to page 26 on our outlook for 2021.
It is extremely challenging to forecast type of tariffs in this environment by extension providing guidance is off of a challenging but we believe it's important to share of what we think may be possible for our business over the balance of the year.
There are numerous factors that weren't crap with competing at Baxter and uncertainty on back on our business.
The late delivery of products continues to be an acute issue for us and many other retailers. We think it may take until the summer until were from more fully passed the tissue.
Wait till Liberty kept on accompanied by higher transportation costs proper hundreds of providers in some cases, we are incurring unusual expenses to expedite some of our products from.
And Asia to the United States.
Washington of written about projected decline and the adverse in the U S without seeing the type of impact on our business day, we are mindful of that.
Potential for this issue to be kind of on near term headwind for us.
Assuming a gradual recovery in store traffic trends across the balance of the year of books will likely be heavily dependent on the status of COVID-19 cases in various regions of the U S, Canada and Mexico.
And ultimately consumers confidence and comfort and returning to in store shopping.
As we began to work on our Assortments for next year, we're beginning to see signs of inflation in product input costs, particularly those related to Patrick.
On the other side, we're encouraged by consumer response from our product Assortments, which we think of the most compelling on the market in terms of their beauty value on quality and the increasing effectiveness of our marketing and promotional programs.
We're generally encouraged by the trend towards a greater proportion of of the population being vaccinated and loosening of restrictions on businesses on travel.
Our recent experience reinforces the potential for a strong rebound in consumer demand as the pandemic lines down.
At some point from me, even be something of a baby's on coming out of last year, and which will also benefit our business.
Certainly we think back to school of thought would be a nice opportunity for us is more cash return to the classroom full time.
There may be.
No government stimulus put forth as we go forward on it.
The provisions of enacted in the previous rounds related to child tax kind of attractive benefit families. Starting this summer and will extend into early next year at.
All of it that way of actually that from 'twenty, one will be a strong year of or cap rate from the pandemic.
And projecting year of comparability of each periods of last year. It's clearly an issue as we said on our last call. We expect the growth of sales and earnings to be higher in the first half of the year.
A number of factors to note, which will affect the comparison to last year's of second half in particular.
About $90 million of revenue of issue as a result of wholesale shipment timing and the impact of closing unproductive stores.
On the last year's 50 per week contributed just over $30 million of sales, which will not recur this year.
Additionally earnings growth from the second half will be affected by the items noted on page 27, which includes the release of inventory reserves last year at the restoration of compensation provisions and an expected higher effective tax rate given our forecast for more of our earnings are generated here on the U S versus last year.
Turning on the next page with specifics on our outlook for the year end of second quarter.
Strong start to 2021, we have raised our sales and earnings outlook for the year.
We're now planning net sales growth of approximately 10% of from a prior view of 5%.
Adjusted EPS is now forecasted to grow approximately 40% of from growth of 10% of previously.
Debt to adjusted EPS.
$4 16, San from 2020.
This album for fiscal 2021 reflects our expectations for sales growth on all segments and gross margin expansion.
Marketing operating income of approximately $400 million, which would match our performance in 2019 and also represent good expansion in our adjusted operating margin of our last year and 2019.
Our two baskets on any one outlook contemplates higher interest expense driven by the issuance of of senior notes last year.
On an effective tax rate of approximately 23.5%.
But of second quarter, we're planning net sales were up approximately 35% with adjusted operating income of attach it to grow at about the same right.
And adjusted EPS is expected to be approximately 25 per cent versus last year slightly lower than the graph on adjusted operating income data of a higher tax rate, which I've mentioned.
The second quarter outlook reflects our expectations of restaurants that opened up in all business segments.
We're planning restaurant on the fashion again in the second quarter, although at a level of more modest than what we achieved in the first quarter and.
In part due to higher freight cost as we expedite deliberate in order to meet the strong demand, we're experiencing and the comparisons of last year, which included the release of some inventory reserves.
Our outlook also of entire SG&A in part due to a full quarter of store expense as compared to the closure of a year ago as well as higher compensation expense, many components of which were reduced significantly a year ago.
And what they term on ready to take your questions.
Tim do you want to ask a question. Please just north of a bunch of your star one of them you can't afford to keep moving.
If you're using a speakerphone. Please make sure you can choose your most of all of you said each of them.
Okay.
One of you can ask a question so.
First question can choose from them.
But you do think of America.
Hmm.
Just wondering of ethanol.
Are you thinking about gross margins.
Where do you see that shaking out.
At this.
At this point of cheap them, along two years and then.
Sure.
Yeah.
Okay I've gone on gross margin, we're expecting a nice expansion on a full year basis it would be.
Well ahead of what we actually had a couple of of last couple of years kind of space on up until that we've talked about we are making great progress with improving our realized pricing, which in turn I think a reflection of.
Part of that's continuing to improve and be a very compelling data.
Our marketing programs continue.
To improve the matter of fact of gifts and their efficiency and we're continuing to work on our supply chain and all the other inputs that go on to itself right now probably too early to give guidance for next year, but we're going to have very good progress this year.
Thank you.
Yeah.
Thank you next question comes from Paul Newsome with Citigroup.
Hey, guys.
On a bit more of them.
Oh.
Boyd gaming third quarter this year.
He is a day on muscle volume.
Thank you very much.
Net.
All of them.
Most of them too.
Bob.
It was quite a bit.
Yeah.
Flow.
Yeah.
Yeah.
Good day.
Nothing more of all of that you did call.
Moving on.
But some of them.
Yes.
But.
Unfortunately.
Moving to vault.
Yeah.
Good day.
Well I'm sorry, it was a little choppy in terms of your of your message put your focus was on what's driving the gross profit margin relative to a couple of couple of years ago, It's driven by the strength of the product offering that's margin on it.
So on well.
We have our we started on a process of a year or so of Joe in terms of buying inventory more conservatively until at least on.
On inventories.
Relatively new head of marketing who it is.
Team has done an outstanding job focusing on boxing on more of the emotional content of the brand and much less of the problems of promotions charge of result, because of the strength of the product offering leaner inventories more attractive market and we're seeing better sell throughs on product launch part of kind of clearance rack at the end of the season.
Better margins. So I would expect that we would continue to build on the margin performance.
This year going forward.
Well the only net.
Hum.
Yeah.
No because it was.
Laclede ecommerce ecommerce is driving the business and we're editing out would not quote something of the lower margin stores and driving more of on consumers want very high margin ecommerce business and our higher margin stores located closer to their homes.
All of that.
That's important.
All of them.
On a commodity.
Yeah.
Most of them.
Yeah.
On input cost topic, I think that was your question.
We're in the early stages of putting our initial assortments together for next year. So I would tell you from first of all very dynamic situation of minutes in process with them on like what we've seen so far or just some of the input cost related to faster on higher cotton has been generally higher than it was a year ago on oil prices have kind of rip out there shopping kind of compounded and kind of.
And then put them on it and some of our products.
So those are the element of I think there's also.
A lot of ever comes out of China, there's varying.
But a lot of companies like that sort of are making to move.
Move on production of bed around relative to some of the issue of go to come up relative to <unk>.
Some of on some of the ESG issues in China, all of which it.
And so.
To constrain our African availability of Blah blah blah blah. So we're working with on our team in Hong Kong and our supply chain is and on top of that it's.
I'll bet, you relative to try and quantify it. We're just we're just break it up I can think of that to say this is what we're seeing so far is we put tons of assortments together sure.
Visibility of the spring 'twenty two product cross when we update you again in July.
Well.
Both of them.
Okay. Thanks, very much of our friends to join us.
Thank you next question on can you please.
This will be one of them.
Hi, good morning, maybe half of them accordingly.
On the guidance for second quarter.
Curious kind of what T. J in terms of like query of second quarter.
It looks like the debt.
On the earnings guidance it is not.
2019, one of those.
Well, let me talk to a corner of obviously outperform the assets just kind of curious your thoughts on kind of of the King Air two culturally.
On the pattern of of business, Kevin can't change very considerably from <unk>.
For the quarter Susan.
We're expecting very good revenue growth.
I think if you look back to two of last year, we have a substantial portion of the stores closed for most of the second quarter, we had suspended shipments of our wholesale customers as they were trying to figure out what their reaction of bad news on the arrival of a pandemic of mine. So we're gonna have very very strong growth on natural that it sort of a comparable to what we did in the first quarter because I think the comparison.
Two to last year of change its pretty meaningfully, but we're expecting solid growth across wholesale tariffs on our in our retail business I was thinking of Brooklyn, and international and continued market expansion. So also gross funding of very good quarter here.
Great and then just on the inventory price. So it sounds like maybe you feel like you could have more inventory I guess, how are you thinking about inventory that goes on the second quarter and back half of May you called out of comparable issue.
And between last season.
Does that mean, you won't have as much inventory in the tier of the April two.
Sure, it's kind of a higher inventories of back to school of giving you should have.
On the line was back in School Bus Inc.
Well I'd say two things one we have taken some steps to expedite and try and bring product in.
As early as we can because of of demand we're seeing.
It will be a good thing just from a forecast point of view on affecting inventories will be probably more flattish if we exit fee.
Second quarter and they'll be off of debt in Q3, and then on declining a bit towards the end of the year.
We have in some cases increased our inventory of inventory, we were able to add to our commitments just given the strong projected demand.
Some of that when it relates to the back of school student debt.
We did increase some of our inventory is in order to kind of look at law on hand to meet the demands of a forecasting is a very dynamic situation and it's good it's week to week I don't have a big chunks of non operational area, who are trying to keep track of of all of us for us but.
With a married of transportation delays and Alex I'd mention more factory related issues that theyre dealing with that surge in the infections and some of these key country.
Of course, some delays and generally though in general we're trying to bring on product and as quickly as they can in some cases of that means that maiden name that we hold of a bit longer and we'd rather have it on hand and have the uncertainty of when it may show up.
Great Okay. Thanks for that.
Very helpful. Thanks for all of the decathlon and cut back in second quarter. Thank you.
Thank you. Our next question comes from James Jang with one of them.
Good morning, Thanks for taking my question.
Well, a little more color on.
On the.
What are some of them.
Can.
How big of a day before means.
Walking off of <unk>.
Hmm.
Thanks Tommy.
Yes.
Sure Jim just to keep it won't be till middle of play of a real excited about Oh pardon me of the sustainable.
Sustainable successful opinions of what.
What's your share it with you in the titles of distracted for a day identical we had some good learnings so we decided to do.
So you really want you more folks on latest Marshalls online website.
Website with all of about four or target stores and on target com as well its really beautifully work conducted to get a chance to look at it on the weekend.
Really strong responsible marketing effort to most of their head of power.
Of all sustainability show early reads are exceeding expectations I hesitate to put on more of it lined out debt.
Got it wrong and we think we can make a couple of strength of water.
Market.
A lot of new models, we're really focused on sustainability of organic from so we think it's an important part.
Part of our business going forward and we're optimistic.
Particularly the baby component of that and up into problems. So on so we'll keep you posted on that progress, but too early to quantify it.
You have of change why some of that is that is it bringing retail.
A lot of our age up strategy.
No.
We got really good flow from that strategy going forward I think on a percentage basis our cash.
Kim Crawford is the largest percentage of growth we had on Q1, if we get a little bit of about flat from last year on the kids World what home they weren't in school.
The mini surge this year between of stimulus and some of the schools opening up of so that helped us as well, but we do think of it. It can continue to say that this age up strategy of between store squadron of as a component of operating debt, adding products, adding categories and think it's a really key weighted increase of lifetime value of a customer to do require a baby.
The merging of every additional you need to keep them on a brand of truly get from a coffee shop, well just optimistic about debt again, probably on a big case kindergarten through the eyes of percentage growth of once we get on the property for numerous quarters, including Q1. So we look forward of that going forward or back to school will be.
The list of picture of all of the schools will be opened up for.
For the students per lot of as we go on the fall of that's a key a key criteria for us will be celebrating with a return to the same level of honestly one of US here I think are.
I think the positioning of the age up from 21.
Thanks, a lot.
Net treasury shares.
And then can you just.
It sounds like you had a very strong Easter week I'm curious how did you see most of you call. It for this year.
How are you planning for all of interest expense.
Can we get it we get out of goodness, we're smiling in the room, because we made a decision when we were having besides of the pulse of of platelet left you with all of spring is gonna be of he actually passing on most dressy Easter flow options from this spring.
Debt.
With the Lockdowns in the dark corner of that business would be sort of it.
So we do have a lot of dinner of one of other beautiful products of chocolate baby's first used of protocol.
First of all of it of Amtrust as well and what happened is we get on a surge in demand where are we sort of our sales were up to.
I guess of kept us out of of 2019 profits were higher.
People in March and April together of what he called Michael Arthur.
Exceeded that of 2019 levels. So we had a really good selling but I think the teams did a good job of positioning some of the more casual dresses at sort of a welcome to you did have in boys to capture some of the dominion, but the actual most dressy Easter probably did not have on the floor of this year, we pack and hold on for next year.
We found interesting Jim of consumer behavior over the past year, our secret of business was true of the roof, because most kids at home.
Virtual learning and you're sort.
Jim It was as we moved into the spring this year and so a lot of of a better performance with casual dresses because we're moving into the warmer weather months, we're starting to see the.
You know the nice throughout the expense you're out there starting to perform better expense people are anticipating getting out and about and going to give you free up our on going on vacation and so its insurance is gonna be factoring in receipt of consumer behavior as more people are vaccinated of any children start to go back to school. This is.
This age up strategy, there and can.
We've shown good progress with the older age of strength.
So combined it's about a $12 billion market, it's actually slightly larger than the baby and toddler markets.
Alright.
At this point, we're seeing very good progress on growth in those Oh ages five to 10 year olds on markets with the successful play their strategies.
From phone calls.
Well.
Thanks, Jim.
Can you kind of multiple she comes from one of them.
Got it.
Hey, good morning, everyone of them to close from that you can see what's going on I think almost could you maybe talk about ease of profitability between kind of them.
All of them, but you don't necessarily Q1 because of the war.
Of course relative to history of what you guys are comfortable.
Some of them take care of Jefferies.
So on the puts and takes on more.
All of the plans to expand it.
T O.
Simple meals the performance that you see you can think.
Okay.
So I can't be.
E Commerce continues bureaucrats are squarely margin business.
And I would say the margins on better than they've been in the last couple of a couple of years of that.
The beautiful combination of the stores and ecommerce together, that's what you'll continue to hear us talking about these omni channel customers because they are our highest value customers.
Shop more frequently they spent about three times with some of the channel customer on an annual.
Our basis of that that is where we're anticipating the growth to come over the next five years, both direct to consumer and through our wholesale.
Customers and there are some share there.
Online performance of our premium for our wholesale customers has been particularly good with respected to be free.
Leveraging over 600 of our stores in the United States from millions of Hawaii. We're also now starting going forward.
Without that capability up in up in Canada as well so are all of them.
Multi channel distribution center here North of Atlanta.
It was getting some relief.
Supporting the fulfillment of online purchases through the stores that share.
Can you speak of out over the next five years of interest bearing debt.
They need to expand the capacity of that good work underway and kind of if I understand it will probably have a point of view on that probably within the next 18 months.
Got it.
Maybe for a decade.
Most of our mutual almost.
Difficult comparisons, but it didn't really come from two of these.
Store comps since the day I don't know all day.
Yes sure.
Curious on the store performance in India.
Based on your guidance you got to move vehicles.
All of the difficult almost the day of especially as of second quarter.
Should we be expecting that in the guidance.
Almost all of them.
Did you have any quota all of that's normal.
And then there's a lot of them on how much of that I would say that we're expecting that E. Commerce was a little softer in Q2 relative to the 100 Bucks per cent comp we generated in Q2 of last year, probably not read of what we're saying.
You can see that that's that torrid pace from kind of from a year ago I think the store costs of its probably not meaningful compared to last year because of the closure I would say, we're still running down traffic of 2019, and that's how we're trying to kind of.
Kind of a benchmark ourselves away from running ahead of the industry benchmarks that we look at sort of the whole industry continues to be down from a store traffic point of view of we've been running better than that of those resolved, but our forecasts indicate that that will get better over time, but that continues to be kind of on other key the key reservoir monitoring how quickly it will folks feel comfortable getting out and about.
And being comfortable being back in stores again.
But you're not assuming negative performance.
Okay.
Yeah. The outlook that you kind of sales expected to be down slightly in Q4 at the store counts significantly in wholesale up massively on we weren't shipping anything of a year ago that doesn't need of drivers.
Thank you.
Same idea.
And your next question comes from James Huang of UBS.
Great. Thank you so much I just want to ask about.
The second half guidance.
All of us whats implied in the guidance it sounds like if you compare what you Gotta do lifetime versus when you go to the Q1 result.
Neither of the guidance of about 50 cent from all walks from second half of year, but more of a sort of implied guidance is that just conservatism on some of them.
Hi Chi.
And in terms of dependent nature dependent on how sort of way.
Or is there some other aspect of it on somebody's going around the business kind of jumping parish and whatnot that could be impacting net large.
And you can cause of surgery I'm, sorry, the second half will not be comparable to the second half of 2020.
Two things on the sales side or I forget it's important for you to know we need the weight per shipment of our full product offerings last year into the second half because of stores of approach those fall product launches, including the.
Poor of on a.
Carter's baby product offering, which is a little baby basics of that's going in the second quarter. This year. That's that's that's what you're trying to significant growth in our wholesale business in the second quarter.
So you're on a $50 million from last year of shifting from the second quarter of this year. Richard also referenced we're gonna of store closures or sort of it.
Closed over 60 stores to date approach over hundreds of this year for the impact.
Impact of second quarter, this year or some portion of about $40 million sort of what we had last year 40 million more on the second half and we won't have that on the second half. This year are going to partner of the top.
The third week last year and that was over $30 million, she's got well over $120 million.
Of second half sales.
Last year that won't won't won't be repeated in the kind of second half of their sure. So.
If you do kind of as well.
Where do we go from here, what we're having good mid single digit growth from the second half of this year exclusive of some of those non comparable items on the earnings side, because you've got the earnings from that wholesale share and you've got a release of reserves in the second half of last year that won't happen. This year, we put on some significant reserves and that's true.
Quarter last year, when the pandemic per person moved through the year It had better progress with excess inventories work on them through the stores.
We released over $20 million of inventory reserves in the second half of that won't repeat.
We curtailed compensation across the board significantly on the pandemic occurred last year gross compensation of provisions.
Historically sure. So that's the combination of those three things is well over $50 million, but also started working on the higher freight costs, because we're a little extra on the.
The receipt of product from Asia, we're trying to bring it in earlier to get ahead of some of them sort of shipping something doing so.
We encourage you to look to the year.
This year will be much stronger than what we anticipated just eight weeks ago and as we moved through the year, we'll have more visibility of what's possible in the second half we have good visibility of the second quarter of what was very strong second quarter and then July they clearly have more visibility of what we what we do.
Think of as possible on the second half, but there's significant comparability issues year over year I would encourage you just to look at the year on year would be far.
Okay.
Got it.
Okay kind of Pennsylvania.
Sure.
And your next question comes from one type of course I'm sorry.
Hi, good morning.
Hey, good morning.
On a deeper on the system.
Microsoft.
Some of them from the past several quarters now teasing, Bob Moore was not performing well.
We look at the acceleration of one way.
Watch all of them.
Call on on what goes on.
Is there a bit ahead of us.
Yeah.
The baby Baby apparel was the strongest component of our growth in the.
The first quarter, but you also spoke very good group of hover kicked in the big current so the growth was particularly good across all kinds of circuits and absolute dollars baby was the largest percentage.
A piece of 10 year old child that was sort of I think.
It's going to be interesting as we move into the second quarter to see that performance.
As we get closer to that six week period.
Those older age segments.
Got it thank you.
My follow up if you take a step back can you share yourself on.
What if anything has structurally changed one of your business or the industry of there won't be COVID-19.
Typically one range.
On the retail footprints.
Follow up on that location its revenue on it.
I'm just thinking there.
So on the structural changes.
[noise] Carter's like many of the retailers.
Benefit of running leaner on inventory kind of scarcity model, having less product on the clearance rack at the end of the season on.
Net merchant together with her team are focused on products out of a longer lifecycle, it's attached to them.
We used to bring in a T shirts, and short term of spring and in 13 of employer discounting going on so we can bring in more of T shirts and shorts.
All lines when stores close last year, our spring product offerings of Alaska was almost to October of last as well through the summer months into.
The early part of fall, so where our merchants of developed new product offerings like the total basic sales and other product offering that has longer lifecycle.
We've learned from some of them or better of wholesale customers from some of the product off of we need to develop for them some of the best performing styles or ourselves.
Our lifecycle of 12 to 24 months. So those are some of the structural changes we are in.
The majority of products with longer lifecycle, and many of the footprint of our shared with you I think it's gonna be a buyer's market when the dust settles on this pandemic, so whereas inc.
Hit the pause button on store openings, we make a lot of money in our stores and see a very high return on investment in our stores and whereas we're closing about 25% of our pre pandemic.
Store portfolio.
I think there's going to be new opportunities to open up co branded stores.
Really productive stores located closer to consumers to provide a high service though.
Our online customer so they can move through the balance of this year and to make sure. We will continue to reevaluate our store opening plans.
And look forward to opportunities that provide a high return on investment.
Most of the work.
Thanks very much.
Thank you. This concludes today's question and answer session and of course.
And as you can see from taking a month.
Well. Thank you all for joining US this morning of Florida operating again on our progress in July.
Right.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
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