Q1 2022 Carter's Inc Earnings Call
Welcome to Carter's first quarter fiscal 2022 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.
And treasurer.
After today's prepared remarks, we will take questions.
As time allows.
Carter issued its first quarter of fiscal 2020 earnings press release earlier. This morning, a copy of the release and presentation materials for today's call have been posted on the Investor Relations section of the company's website at IR Dot Carter's Dot com.
Before we begin let me remind you that statements made on this conference call and in the company's presentation materials about the company's outlook plans and future performance are forward looking statements actual results may differ materially from those projected.
For a discussion of factors that could cause actual results to vary from those contained in the forward looking statements. Please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials posted on the company's website.
On this call the company will reference various non-GAAP financial measurements.
Reconciliation of these non-GAAP financial measurements to the company's fun GAAP financial measurements is provided in the company's earnings release and presentation material also today's call is being recorded.
And now I would like to turn the call over to Mr. Casey.
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.
First quarter sales and earnings exceeded the plans we shared with you in February our supply chain performance continued to improve inventory arrived earlier from Asia and enabled us to support higher demand from our largest wholesale customers.
We also had stronger than planned growth in our international sales driven by our operations in Canada, and Mexico and saw higher demand than expected from our multinational wholesale customers.
We had planned at retail sales lower in the first quarter to reflect the impact of closing of low margin stores last year.
Shift in the timing of the Easter holiday and the significant impact of the nearly three trillion dollars in government stimulus that drove higher consumer spending in the first quarter last year.
Recall that in late December 2020, President Trump approved a nearly one trillion dollar stimulus package. Just 10 weeks later President Biden approved in nearly two trillion dollar stimulus package.
A good portion of the stimulus was focused on helping families with young children.
Growing each of those stimulus payments, we saw a meaningful lift in our retail sales in the first quarter last year, including an over 30% increase in ecommerce sales.
A year ago. Many of US were still working from home. We believe the combination of the significant stimulus benefits and ease of shopping from home drove record online sales force in the first quarter last year.
Thankfully store sales in the first quarter were better than expected, we saw that positive trend beginning last year with greater access to the vaccine and confidence in its protection people are returning to shop in stores.
We saw good growth in store sales in April up over 8% as consumers got out to shop for spring outfits year to date E. Commerce sales are lower than we expected.
Our year over year comparisons are expected to be less challenging in the months ahead.
Final round of stimulus payments in the form of prepaid child tax credits began in the second half last year those payments were smaller in amount and less impactful to our sales.
Suffice it to say the last two years have been unlike any other time in our lives and year over year comparisons are distorted by global events, a more meaningful comparison of our performance. This year, maybe to the pre pandemic period in 2019.
Through that lens, our first quarter sales grew 5%. Despite the closure of 115 low margin stores that generated over $30 million in sales in the first quarter of 2019.
Our operating income in the first quarter of this year with 70% higher than the same period in 2019.
Our significant improvement in profitability compared to 2019 reflects structural changes to our business made during the pandemic by focusing on fewer better and higher margin product choices closing lower margin stores running leaner on inventories focusing our marketing and brand building.
Versus promotions and improving price realization.
We believe the record operating margin achieved last year is sustainable.
Given our current outlook for the year, we are reaffirming the annual sales and earnings guidance, we shared with you in February .
For the year, we're forecasting growth in sales in each of our retail wholesale and international segments.
<unk> growth is expected to come from our wholesale business, we're projecting growth with five of our top six wholesale customers. This year.
We continue to see good demand for our exclusive brands sold through the worlds largest retailers Walmart target and Amazon sees retailers disproportionately benefited from the pandemic.
They provide one stop shopping for the essential core products that families with young children replenish on a frequent basis, including diapers formula and groceries Carter's benefits from those frequent visits.
We're also forecasting good growth with our flagship Carter's brand and wholesale customers are more department store like customers were most affected by pandemic related store closures in 2020 and consumer shifting to the essential retailers that remained open.
So our sales to these customers are not yet back to the 2019 level of sales our flagship Carter's brand wholesale sales are projected up low single digits. This year and at a margin rate higher than we realized in 2019.
Our growth in wholesale sales this year will reflect the roll out of our eco friendly little planet brand to more stores and online at target Kohl's buy buy baby and Amazon.
We've gained more for space for our toddler swimwear sleepwear and holiday product offerings for our flagship Carter's brand and exclusive brands Skip hop is launching a durables product offering under our simple joys brand with Amazon. This year focused on diaper bags, Bath time and playtime activities.
And together with target and Walmart, we are re launching our brand marketing for our just one you and child of mine brands to more prominently present in store and online our Carter's brand, which is the best selling brands in young children's apparel that brand relaunch will be executed in time for the back.
To school shopping season.
Carter's has the largest supplier of young children's apparel to the largest retailers in North America. These retailers view our brands as traffic drivers, we focus on essential core products like Bodysuits wash cloths towels bibs blankets and pajamas. These consumer staples are purchased in multiple.
<unk> in those early years of life.
We sold over 25 body suits for every child born in the United States last year, our average price points to the consumer are planned to be less than $11 per unit. This year up less than 80 cents per unit, it's a very affordable purchase at a great value given the beauty quality and end use of.
Our product offerings.
Our international segment is to be is expected to be the second largest contributor to our growth. This year. We're planning mid single digit growth in our international sales driven by our operations in Canada and Mexico.
We are the largest branded marketer of young children's apparel in these countries. These are multichannel operations with wholesale retail store and digital businesses.
Canada is the largest and most profitable component of our international business, we have more than twice this year of our nearest competitor.
Canada is rolling out our new little planet brand to more stores given stronger than planned demand since the launch last year.
During the pandemic, we invested in omni channel capabilities in Canada, including same day pickup of online purchases at our stores and ship from store capabilities.
In the first quarter over 26% of the online orders in Canada were fulfilled by our stores. These are margin accretive transactions relative to shipping from our warehouse in Canada.
With stronger digital capabilities E Commerce penetration has grown to over 30% of our total retail sales in Canada double the pre pandemic penetration in 2019.
We're planning double digit sales growth in Mexico. This year, we plan to replicate the success, we achieved in the United States and Canada with our co branded store model, we are converting our smaller standalone Carter's and Oshkosh stores in Mexico to the larger more productive store model.
Over time, we see an opportunity to more than triple our store square footage in Mexico through store growth and our co branded store model strategy.
There are over 2 million children born each year in Mexico compared to less than 400000 children born each year in Canada as the leader in young children's apparel, we see both markets as good sources of growth in the years ahead.
Our international wholesale sales are planned comparable year over year and more profitable than each of the previous three years.
With good international wholesale partners, including Walmart, Costco, Amazon and other retailers, representing our brands in over 90 countries. We believe these profitable relationships should contribute meaningfully to our growth objectives.
We're projecting low single digit growth in sales and earnings in our retail segment. This year, our focus will continue to be on reducing the mix of lower margin stores opening stores and higher traffic centers that provide good returns on investment.
Getting lean on inventories in investing in omni channel capabilities that drive traffic and margins.
We are the largest specialty retailer in the United States focused on young children's apparel with beautiful co branded stores from Maine to Hawaii.
Our best performing stores. So far this year are in the south and West where weather was more spring like and tourism seems to be returning to the United States.
Our toughest comps were in the Midwest and northeast, where weather has not yet prompted consumers to shop for warmer weather apparel year to date, our best comps are in Florida, and California, our lowest comps in New York and New Jersey, We saw the best traffic to our indoor mall stores lowest traffic to our outlet stores and.
In years past as gas prices rose temporarily see declines in traffic to our outlet stores about 30% of our stores are in outlet centers.
Given our progress with SKU rationalization, and inventory management and price realization over the past two years, our store unit economics have improved and more attractive store opportunities are now available to us.
Over the next five years, we plan to open more than 100 stores in the United States net of closures.
This year, we plan to open 30 stores and closed 20, we expect the impact of sales. This year from store closures will be about $30 million compared to last year.
Our focus is on high traffic open air centers that provide convenience for online shoppers, including curbside pickup which became popular during the pandemic stores planned for closure had a low single digit operating margin last year stores, we plan to open our forecasted to earn more than a 20.
Percent four wall operating margin that's been our experience with store openings in recent years.
Nearly 70% of children's apparel is purchased in stores and stores continued to be the largest source of new customer acquisition.
We're leveraging our stores to provide a convenient shopping experience for our online customers nearly 30% of our online orders in the first quarter were fulfilled by our stores, we expect that nearly 40% or more of our online orders will be fulfilled by our stores within the next five years.
These transactions enable quicker delivery of the order at higher margins relative to shipping from our distribution center.
Our marketing team did a good job in recent years linking the credit card transactions to our rewarding moments loyalty program, which incentivizes repeat purchases.
Over 90% of our transactions last year were from customers in our loyalty program, which enables us to analyze shopping behaviors and provide a better experience for our best customers.
Our supply chain continues to work through the challenges of transportation delays caused by the lingering effects of the pandemic on time deliveries to our wholesale customers in our stores improved in the first quarter. We are now routing over 60% of our imports through the east coast with good results.
Our east coast ports are less congested than the west coast and processing receipts quicker for us.
To date, we have not been materially affected by China's recent COVID-19 restrictions, we source less than 10% of our total unit volume from China, our suppliers source, a large portion of our fabric and other component parts from the southern regions of China far from the major cities being locked down further north.
Shanghai ports have remained open but our congested alternative ports are being used to mitigate congestion related delays.
To mitigate the risk of further delays, we have placed factory orders three to six weeks earlier. This year. This strategy should enable our product offerings to get here earlier.
Late deliveries and inflation will weigh on the growth that would have otherwise been possible. This year, we've reflected higher product and transportation costs in our forecasts.
For the year, we've estimated product costs up about 7%.
We expect our freight costs will be up over 10% this year.
Ocean freight rates have more than doubled versus last year, we have ocean freight rate contracts for about 90% of our unit volume through the first half of next year the.
The rates under those contracts are less than half the current spot market rates.
Lower spending on airfreight planned this year and next will help mitigate the higher ocean freight rates.
Best information, we have suggests that freight rates may decrease by the second half of 2023 as capacity improves and global demand moderates in the months ahead.
In summary, 2022 got off to a better start than we expected.
We are forecasting good demand for our brands this year thankfully the favorable trend in burst in the United States that began last summer continued through the balance of last year.
Our baby apparel product offerings represent over 50% of our annual apparel sales in our Carter's brand has nearly four times the share of our nearest competitor.
In the first quarter, our baby apparel sales were up about 6%. It continues to be one of the strongest components of our product offerings.
We've raised prices thoughtfully this year to help mitigate the effects of inflation to date, we've seen no noteworthy resistance to pricing from our wholesale customers or consumers interestingly some of our best performing products year to date are the higher ticket special occasion collections.
<unk> appear to be refreshing their children's outfits in anticipation of a summer vacation getting back out on the road reconnecting with families and friends.
Carter's is the market leader in children's apparel no. Other company in the kids apparel market has the scope of product offerings depth of relationships with the winning retailers and long track record of success for many years, serving the needs of multiple generations of consumers.
We believe we've weathered the most challenging days of the pandemic, we will continue to focus on the things, we can control and mitigate the effects of what we can't.
I want to thank our employees throughout the world, who enabled a stronger than planned start to the year and for their commitment to help Carter's achieve its growth objectives. This year.
Richard will now walk you through the presentation on our website.
Thanks, Mike Good morning, everyone.
I'll begin on page two of our materials with our GAAP P&L.
Net sales were $781 million and reported operating income was $103 million in the first quarter we.
We had no non-GAAP adjustments in this year's first quarter and only minimal net adjustments related to Covid and the prior year. These adjustments are detailed on page three.
So turning to page four with some highlights of our first quarter performance overall.
Overall, we delivered good results for the first quarter, we had planned sales and profit about profitability down versus last year due to the non comp of the significant government stimulus last year. The later Easter holiday this year and meaningfully higher transportation costs.
Our results, though were stronger than we had planned our inventory position was better than expected, which enabled higher shipments to our wholesale customers and spending was also lower than forecasted.
As Mike pointed out while our results were below last year's record first quarter performance. They.
They were meaningfully above 2019, as pre pandemic level, reflecting the many benefits of the improvements we've made across the business.
Our adjusted P&L for the first quarter is on page five.
Sales were down 1% versus last year to $781 million, we posted over 8% sales growth in wholesale and 11% growth in our international segment.
Sales in our U S retail business were down 10% versus a year ago, reflecting the tougher comparison to last year's stimulus and the later Easter holiday this year.
Gross margin was 45, 4%, which was down 440 basis points from last year more than half of this decrease was due to the higher inbound transportation costs, which increased over $20 million or nearly 60% over last year.
We expect transportation costs to be elevated well into next year and they will be higher than we had originally planned for the full year in 2022.
The vast majority of our ocean container volume is under contracts, which extend into the middle of next year. Our contracted rates are well below current spot market prices, but still represent a meaningful increase over what we were paying last year.
We've taken steps to raise pricing and reduce other spending across the business to cover these higher than expected transportation costs.
Gross margin was also pressured by a higher mix of wholesale sales and less retail sales.
Our wholesale volume in the quarter included more off price channel sales related declaring out later, arriving fall and holiday product, we're expecting that off price channel sales will be lower over the balance of the year and meaningfully lower on a full year basis than in 2019.
First quarter spending was lower than last year by $11 million store expenses were lower as a result of our permanent store closures and compensation costs were also lower than last year.
Distribution and outbound freight costs were higher as was our spending on marketing in the first quarter.
Adjusted operating income was $103 million down about 20%, which as I've said with a smaller decline than we had planned.
On the bottom line adjusted earnings per share were $1 66, compared to $1 98 last year.
Yeah.
Turning to page six and some highlights of our balance sheet and cash flow our balance sheet remains in great shape, we ended the quarter with substantial liquidity.
Receivables were higher as a result of the strong growth in wholesale sales in the quarter.
Inventory was up 21% the quality of our inventory is very good as I said, we have moved through the majority of late arriving product from prior seasons.
A few things a few things drove the year over year increase in our inventory units were up 9% and as planned product costs were up over last year in.
In transit inventory remains elevated although less so than at the end of last quarter.
As Mike mentioned, we are taking ownership of inventory three to six weeks earlier than typical given the higher transit times from Asia.
Inventory levels are expected to be higher year over year through that throughout the balance of the year with Q2, ending inventory projected up over 30% versus 2021.
We're expecting year end inventory will be up high single digits with most of the increase representing product cost inflation and units more or less even with last year.
We see good demand for our products in the second half of the year given the myriad of supply chain issues over the past couple of years, we're fortunate to have the resources and wherewithal to be able to bring in inventory early and hopefully better meet projected demand.
Long term debt as presented on our quarter end balance sheet was lower by about $500 million.
Which reflects reclassification of our pandemic related senior notes as a current liability.
We redeemed these notes in early April this financing had been put in place to provide additional liquidity in the very early days of the pandemic.
Fortunately given the resilience of our business over the past two years. So we didn't need this financing by redeeming. These notes early we will lower our annual cash interest cost by $28 million.
Our cash used in operations was greater in this year's first quarter than last year, which largely reflects the higher inventory level and higher performance based compensation payments in the first quarter, which relate to the record performance achieved in the business last year.
We're expecting to generate good operating cash flow for the full year in the range of $275 million to $300 million.
We continued to return capital to our shareholders in the first quarter, we paid dividends of $31 million and repurchased $74 million of our shares.
On page eight we've summarized our business segment performance in the first quarter at a high level, our consolidated sales decreased slightly by $6 million or 1% versus a year ago.
Sales were lower in retail, while we had good growth in both wholesale and international our.
Our operating margin declined versus last year's record level virtually all of which is attributable to the over $20 million increase in transportation costs.
Corporate expenses were lower by $10 million due to lower consulting and performance based compensation expenses.
Turning to some additional detail on our business segment performance in the first quarter on page nine.
And retail sales were down as I mentioned in our total retail comp declined by 7%.
A year ago, our government made a record level of direct payments to American consumers as part of its response to the pandemic.
These payments benefited our retail business last year and were not repeated this year.
Additionally, sales were lower because last year, we closed over 100 low margin stores to better focus our store portfolio and higher opportunity and more profitable locations.
Finally, Easter is an important holiday in our business and it fell later in 2022 versus 2021 likely shifting sales volume out of late March into the second quarter.
As a result of these factors traffic in our retail channels, both stores and ecommerce was lower than last year.
We believe some other factors likely also weighed on our direct to consumer business in the first quarter, most notably the surge in inflation and lower consumer confidence prop.
Profitability in retail was affected by the lower sales and the higher transportation costs that I've mentioned.
Business. So far in April has been slower than expected. We are planning for low single digit growth in retail comps for the second quarter and full year.
In wholesale we had 8% growth in sales, which was above our forecast as I said, our on hand inventory position was better than we had anticipated and to a lesser extent some customer demand came earlier, allowing us to ship more in the first quarter.
These sales about $14 million in total had been planned previously to occur in the second quarter.
We saw good growth across our our wholesale customer base in the quarter, including with our exclusive brands.
Profitability in wholesale was affected by a higher mix of off price channel sales and higher transportation costs, including some residual spending on airfreight.
We had a very strong quarter in our international business we.
We had strong growth in Canada, and Mexico, and in our international wholesale business, particularly with our Brazilian partner.
In Canada, we saw strong growth in stores a year ago stores, we're largely still closed in Canada and sales rebounded strongly in this channel.
Profitability was down about 50 basis points and international margins benefited from the strong recovery in Canadian store sales and higher sales in our high margin international wholesale business offset by higher transportation costs, which are affecting all parts of our business right now.
On the next page, while our profitability in the first quarter was.
Each of our businesses.
So the pandemic in 2019.
As you can see each of our business segments was meaningfully more profitable in this year's first quarter and back in 2019.
As Mike mentioned in his remarks, the changes we've made across the business, including focusing our product offerings to fewer longer lifecycle choices operating with leaner inventories, having a higher quality store portfolio and a more effective approach to pricing and promotion has led to a stronger and higher margin business.
These improvements are helping us to manage through the current challenges of inflation and product and transportation costs among other areas.
On page 11, one of our traditional product strength is around holidays and special events. These products are staples of our assortments, both at wholesale and in our direct channels.
Now that we're hopefully on the other side of the pandemic families are eager to celebrate whether it's baby's first Valentine's day Easter or the fourth of July .
These products help us to deepen our relationships with consumers and they drive brand loyalty and traffic the.
The nature of these products, which are oriented around distinct and different events and holidays throughout the year drives visit frequency to our stores, our website and to our wholesale partners.
On the next page where earlier this week, we launched a collaboration with Dunkin' Donuts, everyone knows Dunkin', especially sleep deprived parents in search of caffeine.
This limited capsule of Dunkin' themes products is largely sold out in only a matter of days since its introduction our.
Our friends at Dunkin are fond of saying that America runs on Dunkin' and we would expand this not to say that parenting runs on carters.
Moving to page 13, I'm told millennials check their phones, nearly 150 times a day and they're incredibly active every day on social media our brands continue to lead in social media engagement and we're building out our capabilities with newer and rapidly growing social media platforms like Tictoc.
On page 14 in addition to social media, it's important to offer consumers easy efficient and fun ways to transact digitally.
We've talked a lot over the years about our leading ecommerce website.
Our mobile App has quickly become very popular with our customers and now represents a meaningful proportion of our online sales.
Our Carter's credit card and loyalty programs are also important elements of how we engage with our customers. Both of these programs have proven very successful our credit card and loyalty programs are used in the vast majority of our retail sales.
On page 15, we have some great little planet imagery, we expect to see meaningful growth in little planet. This year. The brand is expanding to 270 retail stores in the U S and Canada with new points of wholesale distribution, including Amazon target Kohl's and buy buy baby.
Recently expanded a little planet product assortment to toddler sizes, and we're adding new categories, such as swimwear and shoes.
On page 16 last week, we marked Earth day with the launch of our new ESG, a consumer facing platform theme.
<unk> raised the future one important element in addition to our social and governance priorities is communicating our commitment to creating a sustainable world, one, which we and families raising young children can pass along to future generations.
Our product hang tags and in store messaging had been redesigned to emphasize our sustainability initiatives, including the use of certified organic fabrics and recyclable materials and our products.
These themes will also have a prominent place in our messaging across our various social media platforms.
On the next few pages, we have some imagery and brand messaging related to several of our wholesale customers target Walmart Amazon and calls are among the largest retailers of young children's apparel in North America.
And they happen to be our largest wholesale customers.
On page 17, we have a terrific photo of the just one you brand wall at target. In addition to photos of a couple of our highly productive floor fixtures.
The brand, while it's a high margin replenishment component of our business at target and is where consumers can easily find the must have essentials for babies we continue.
To expand our product offerings that target with the addition of swim and older age sleepwear.
Four of our brands are sold at target. In addition to just one you target also carries Oshkosh, and skip hop and little planet.
On page 18, our child of mine brand exclusively available at Walmart also continues to grow through new product introductions and expansion of existing categories.
I mentioned, our expertise earlier in events and holiday oriented products and we've launched events. This spring at Walmart with with an Americana aimed red white and Blue collection targeting the fourth of July .
We are planning to expand our event offerings at Walmart in 2023.
And at the bottom of the page. We have included some new branding for child of mine, which we will rollout. This fall this new branding more strongly emphasize his childhood mines Carter's DNA.
Page 19 is a photo of some beautiful summer essential products from simple joys on Amazon consumer.
Consumers continue to make our simple joys brand the best selling children's apparel brand on Amazon.
In addition to the expanded assortment of playwear and size is four to eight or planning on launching some new skip hop designed Baffin playtime products and also a diaper bags under the simple joys brand later this year.
On page 20.
Causes our largest wholesale customer for the flagship Carter's brand culture has been a great partner in the breadth and depth of the Carter's assortment, which carries the branding and product presentation of the Carter's brand in store and online at Kohl's are among the most effective in the wholesale channel.
In Q2, we will refresh our core baby assortment alcohols and are planning good sales growth.
Turning to the next page we have spoken on recent calls about our growing presence in Brazil with our partner <unk>, Brazil is a large and attractive market with $2 7 million new babies born each year.
To date risks Rolla has opened nearly 30 Carter's branded stores in Brazil.
Here are the newest stores in Brasilia in Sao Paulo.
Carter's branded stores add to over 260 Carter's shop in shops.
Within <unk> as well as department stores across Brazil.
We're looking forward to the continued build out of this high opportunity market.
On page 22, we continue to expand globally into new markets shown here is a carter's a new Carter's store in Uruguay.
This is a smaller market in South America, but the Carter's brand has strong brand awareness in this country or partner here has now opened five Carter's branded stores. In addition to managing the ecommerce channel in this market.
Turning now to our outlook beginning with second quarter on page 24.
Net sales are projected to be in the range of $750 to $775 million, which would represent growth of just under 1% up to about 4%.
We're forecasting operating income between 95 and $105 million and adjusted diluted EPS of $1 60 to $1 80.
We're expecting lower wholesale sales given the move of some demand previously planned for second quarter into first quarter.
We're forecasting continued improvement in price realization and we will have increased costs for freight and transportation.
Earnings per share is expected to benefit from lower interest expense and our share repurchase activity.
Relative to our previous first half guidance, we've adjusted the lower end of our previous outlook for sales by about $20 million or about 1% to reflect the slower start to the second quarter.
First half earnings are in line, if not somewhat better than what we had planned previously.
For the full year on page 25, as we told you on our last call. We're expecting another good year, both in sales and earnings.
Our forecast is that we will build on last year's record performance.
So today, we are reiterating our full year guidance.
We're forecasting net sales growth of 2% to 3% adjusted operating income growth of 4% to 6%.
And adjusted diluted EPS growth of 12% to 14%.
There are many factors, which we believe will contribute to this projected performance in some of the more significant ones are listed here. There is no shortage of challenges in the marketplace right now we've spoken to several of them inflation across many important cost of the business, including product input costs and transportation the.
The risk of slowdown in the economy and possible resurgence of COVID-19 , including potential disruption to factories in ports in Asia.
But the last couple of years have demonstrated the strength of our business and the resilience and creativity of our employees.
Cross Carter's our teams are committed to delivering a very successful 2022.
And with these remarks, we're ready to take your questions.
Thank you Ed to ask a question you will need to press star one on your telephone to withdraw.
For all of your question press the pound key.
Again, Thats star one to ask a question.
Our first question comes from Susan Anderson with B Riley Your line is open.
Hi, good morning, nice job on the quarter.
I'm wondering if maybe you can talk about the inflationary pressures going into the back half in 2023, and the kind of the puts and takes that you're thinking about there, particularly as cotton prices are up pretty significantly and then maybe also if you could just give us an update on where you're at with the supply chain issues have you seen an improvement at all and if you expect this.
<unk> expense in the back half or if some of that airfreight won't go away in the quarter.
So Susan supply chain performance improved in the first quarter. So I'd say, it's gradual improvement, we've got probably a better part of 60% of the.
Shipments to our wholesale customers are on time.
The balance is running some portion of about three weeks late I think that's generally what's going on and onto the market in terms of inflation. The big chunks of inflationary pressures are in product costs and transportation much more on the product cost side. So as we shared with you earlier product cost will be up mid single digits in the first half high single digit.
In the second half we have raised prices.
To make sure that we can achieve our margin objectives. This year to have at least the same margins, we had last year, if not a bit better.
The freight cost since we chatted with you in February our higher probably about $15 million higher and so we'll have to adjust our spending elsewhere in the business to overcome those.
Higher.
Ocean freight rates so we've negotiated.
The other half of our ocean freight under contracts, which will now we've locked into through the first half of next year.
Negotiated freight rates under contract now are less than half the spot market rates. So we feel as though although albeit higher we feel as though we're in a good place through the first half of <unk>.
Next year, what's going to help us in the second half is we're comping up against significant and unusual airfreight charges that we incurred in the second half of <unk>.
Last year, so that will help mitigate some of the higher transportation costs that that will now happen in the second second half So transportation cross for US this year, even though for ocean freight rates have more than doubled our freight expenses. This year will be up a little over 10%. So so I think we've reflected what we know and the forecast that we're sure.
With you this morning.
<unk>.
And we feel good feel good about the product offerings feel good about our marketing strategies and so we expect that.
We have the potential have a a very good year this year.
Great. That's very helpful and thank you and one follow up just on the AUR I'm curious.
In the quarter were you able to realize all of the price increases that you are putting through.
Did you promote a little bit more than you were expecting at all or the promotion still very rationale out there.
I'd say, we achieved the pricing objectives in our direct to consumer business and what you saw in the first quarter as we expected off price sales were higher because we cleared out it's Richard shared with you we cleared out.
Late arriving fall and holiday product in the first.
Les arriving last year cleared it out in the first quarter through.
Through the off price channel.
That's when you're going to get the highest and best value for that product by the weather, it's still cold which was.
In the first quarter, we saw good demand for that product so off price as a percentage of our sales in the first quarter around 2% for the year, we expect it to be around 1%.
Great that sounds good. Thanks, so much good luck, thanks very much.
Thank you and our next question comes from Paul Lewis with Citi. Your line is open.
Hey, guys. Thanks, just.
In the first quarter, how much did the sales to off price impact your gross margin and <unk> also curious what's going on on the DNA line looked like that was a bit lower.
And then by looking at the cash flow statement soaps curious how to model that go forward and then you mentioned April started off a little bit weaker than anticipated just curious which pieces of the business and what you think the drivers are and might have confidence in reiterating the full year. Thanks.
Yeah, So Paul of the 400.
Decrease in gross margin year over year in the first quarter. It was about 100 basis points that I would call mix and I would say the higher.
Portion of off price channel sales is a good proportion of that so call. It 100 basis points of the 400 was mix related and specifically related to off price on your question on depreciation it is down it will be down kind of all year from memory depreciation is forecasted to be about $70 million and I believe it's about $90 million for the full year at last year, There's a couple.
Things that work there one just the <unk>.
Pact of having closed over 100 stores over the balance over the course of 2021, so expenses related to those stores are out of the base and then I would tell you in our technology spending theres been a longer term shift away from Capex dollars more towards software as a service solutions for the various new technologies that we're putting in.
We had very low Capex I would say in general in 2020, just during the pandemic here. So some of that's probably reflected in depreciation being a bit lower as well.
And then April .
Part of your question on April .
Yeah Paul.
Yes, just to update.
What drove it.
What I was asking and then why you have confidence to kind of reiterate the year April started off a little bit weaker in April is a little softer our stores had been up I think Mike said about 8% in April E. Commerce has been lower Easter was softer than we planned and that's really probably the key on that one and we believe it.
No, we really haven't seen that warmer weather across the country yet so.
<unk> every every season as the weather gets a warmer in the spring and summer and cooler in the in the fall we see a pop in our business, we have not seen that yet but.
But April is a little bit below what we planned we're comping at about a negative one right now.
April based on the slower start with Easter.
Got it and then just if I can remember one follow up what are your order books look like for the back half if that's something you could talk about.
Wholesale of the business has been good as you know we beat Q1, we were up about 8%. We're planning the first half up mid single digits in the second half up mid single digits as well I believe so I think if we're successful with our plans and wholesale.
Our sales will be actually comparable to 2019 with exclusion of off price.
Planning good growth with the majority of the accounts.
As Richard shared we've got several new placements for some of our key strategies and age up and little planet and events with our wholesale partners and I think one of the things I'm most interested to see how this develops as we've had we've had a change in the in the birth rate trends progressively better in Q2, Q3 and Q4.
As you know the majority vast majority of the wholesale business is actually baby related so hopefully that can be a tailwind for our business and we had very strong selling in Q1 and year to date and our baby products not only in our retail business our wholesale business.
Got it. Thank you good luck guys.
Thank you.
Thank you we have a question from Warren Cheng with Evercore. Your line is open.
Thanks, guys. Good morning, I had a question on the retail profitability Hey, guys.
The first question retail segment margins were really impressive if you look at if you compare it to what you typically generate in the first quarter, even with the higher freight can you just help us think about how to translate that on a full year basis. If we just look at.
Your changes to your footprint, we've seen freight.
It normalizes eventually.
Think about the kind of going forward retail profitability.
Well the unlocking the business warrant continues to be improved price realizations. So while we certainly have some inflationary pressure in product costs I'd say, we're building back some compensation costs in that part of the business as well just returning store staffing levels to more appropriate models.
The real unlock has been improving our price realization that product costs are up.
That price realization is expected to improve as we move through the back half of the year and certainly as we move into second quarter and in second half. So there'll be more of a contribution from from that improved AUR, even with product costs being up so that I would say that's really the engine. That's really what's allowed us to drive a more profitable business less brand erosive promotions more focus on getting paid for.
<unk> for our good work buying inventory.
Bit of a high fraction, but at some proportion of forecasted demand so operating at a bit more of a scarcity model has reduced the amount of inventory that ultimately goes to clearance, which had become kind of a big issue in both the stores and the online channel, there's just less of that today.
I would add to that one is the mix of stores. We continue to close the low margin stores and opened up higher higher margin stores Thats. The game plan over the next five years will will open up probably more than 100 stores net of closures because of the margins. The EBITDA margins, we're seeing on new stores are in the high 20, 20% range. So very.
Good returns on investment.
Got it and is there a way to quantify that lift from all those different drivers that you said if I just think about the stores that were closed that were low margin.
Some of the freight headwinds that are happening now and if you strip those out is there a way to just quantify kind of the overall lift to the retail profitability, which pre pandemic levels I'll give you a sense, we probably took out over $100 million of sales from our store closures since 2019, and retail is more profitable having done that.
Got it thanks.
And then one quick follow up just on the exclusive can you give an update on what they represent as a percentage of wholesale today and how the.
The profitability of that business has evolved in this pandemic.
Exclusives are just under half of the business and wholesale was 48% exactly.
Quarter in profitability is good it is profitability is slightly accretive to our overall Carter's.
Cry operating margins.
Great. Thanks, guys. Good luck. Thank you.
Thank you. Our next question comes from Jim <unk>.
Here with <unk> Crespi Hardt your line is open.
Good morning, Thanks for taking my question.
You mentioned youre contracted on for Richard the first half 'twenty three just curious how the first half of next year contract rate compares to the first half of this year.
Are they still off.
10% ish kind of range.
Higher FERC first half to first half will be higher.
Next year.
Okay.
And then you mentioned a rebound in tours stores, what percentage of store sales historically come from tourism.
When did you start to see those stores first rebound and where are those stores performing relative to 2019.
Tourist tourist they were talking about Orlando in Southern California.
<unk> Central Valley up in New York.
Probably around 20% of the stores with these or maybe 20% of the stores with these are these are mega stores, we probably do.
Better part of 2000 $14 million in Orlando, whereas a typical store we would open up that is closer to $1 billion. So these are yes.
Encourage more people or if you've traveled.
Many of US have traveled in recent months the planes are packed and more and more people are coming back into the United States and we're starting to see that in.
The tourist locations. So we're encouraged by that so our best performing stores were in Florida.
California in the first quarter and one I think the weather was more spring like and two more people are getting out and reconnecting with families and friends. So we'll see how that if that trend continues we saw I would say we saw it around the holidays that started around the holidays starting to see that in the second half of last year, particularly over the holidays and its continued into the first quarter.
Great.
And then just in terms of kind of future cost inflation I mean, what's your confidence.
Terms of your ability to continue to raise prices.
If inflation continues to be a problem into next year I think there is more we can do on price.
Our average price points are under $11 a unit of you've seen the beauty of our product offerings certainly.
Extraordinary value and we think we used to think about nickels, and dimes and quarters and with through the pandemic, we realized that the.
The consumer.
So I know we saw no resistance from raising the price of $1 two since the pandemic began so theres more if we need to do more we can can do more.
What we experienced back in 2011, when cotton prices went to over $2.
<unk>.
The cotton prices.
Those prices more cotton was planted in within a year.
Cotton prices dropped like a rock so we'll see if that experience repeats itself going into next year, but the best information. We have would suggest a combination of moderating demand and.
And more and more capacity more more cotton being planted that should be a benefit we should expect to start to see sometime next year.
Great. Thank you.
Youre welcome.
Thank you. Our next question comes from Jay sole with UBS. Your line is open.
Great. Thank you so much I just want to make sure I understand the differences between the second quarter guide given today and what was implied for second quarter of last time, it sounds like Theres, a wholesale shift maybe a little bit of a slower start to the second quarter, but maybe you could just outline the other differences between where the second quarter guidance is today and where it was last quarter that'd be helpful. Thank you.
I think it's primarily.
What you just when you just had Jay that we had about $14 million of wholesale volume that we had planned for second quarter that actually took place in first quarter. So that's a bit of a hole relative to the previous plan and then in our retail business. As we've said the month of April has been off to a slower start. So that's roughly a 2020 ish million dollars revision I believe two to our first half guidance.
We did outperform event in Q1, so the combination of those two gets you there for transportation costs, perhaps a bit higher in second quarter than we had planned.
But on balance the profit outlook very consistent with what we had told you before for first half.
Okay got it and then maybe it wouldn't be possible to elaborate a little bit on the South America strategy that you talked about.
In the prepared comments, maybe you just specifically within Brazil, because at $3 billion.
The total addressable market, what kind of market share do you think you can take in Brazil, and where are you now and do you think you can apply this strategy to other countries.
Well Jay we've got we're doing business about 90 countries, what we call our kind of.
Our partners business International partners, we are individually a lot of these partners are small collectively it's a good sized business for us better part of $100 million business high margin business for us reassure all always the partner that.
Has gotten behind the brand just just like the experience we had in the United States, where a lot of.
The major retailers were carrying the brand and saw the strength of the product offering, but <unk> decided to take the brand outside of their department stores and open up stand alone Carter's stores. So they probably have.
A couple of dozen of them now Theres a plan to open up.
Ill open up more of them, but we have partners in Peru, Chile, Uruguay, we have partners all over Latin America, I think you know our history in China was not particularly good and.
Or was there was there were sales volume, but no no profitability in there was there wasn't really much of a path to profitability in China. So we set our sights on Latin America, which has been a very profitable business for us. So we will do far more in Latin America than we ever would have done in China and much more profitably.
Got it okay. Thank you Mike Youre welcome.
Thank you. Our next question comes from Brian Mcnamara with Bahrenburg capital. Your line is open.
Thanks for taking the question.
Thank a lot has been said and written about.
The motion calling of ramping and as it relates to you and your brand.
So if you could kind of talk to those concerns I know we.
A peer of mine are asked the question earlier.
I know you mentioned off price too, but oil price is not a typical promotional channel per se.
So any color there would be helpful. Sure I think promotions.
A function of.
The strength of your product offering how you bought at your forecast accuracy.
Sell throughs of the product offerings. So during the pandemic.
We kind of embraced the scarcity model good good retailers like target, we've learned that over the years by doing business with them. We've learned a lot from target Amazon Walmart in terms of.
How to drive better businesses. The businesses, we've had from them we've learned from them things that we can apply to our own business. So our stores I think in our stores right now we're carrying less than 30000 units per door.
I think it is closer to 27000 units per door, usually over 40000.
Theres very little in our back rooms, and so we've created a kind of an experience for the consumer get it now while its here.
And so if we over by that's the risk in the balance of the year.
Our teams our retail teams our operations teams are mindful.
Being thoughtful in what we buy focus on the things that consumer needs edit the things that are.
Or perhaps not needed and so it's promotions are all a function of.
Are you being smart on the inventory buys so that continues to be our focus here, we were less promotional in the first quarter, we plan to be less promotional in the balance of the year to date, we're achieving our price objectives consumers not not not resisting the higher price at all given the strength and beauty of the product offering there.
Had an update recently from our head merchant, who said some of the best selling product. We have are the highest ticket collections, which are the things parents would buy because their children are now traveling again revisiting families going on summer vacation. So.
So we just have to be smart in terms of how we make those inventory commitments.
Great and do you guys have an explicit expectation for burst this year I know a lot's been said.
The estimates are kind of few and far between but I'm curious is that something thats kind of drives how you look at.
Particularly your baby apparel sales and how do you how are you.
Your expectations for that yes, thankfully the trend there is positive. So we had some data we shared with you in February that we saw first start to increase in June and July and August continued in to September about two weeks ago, We got the.
Data through the balance of the year.
With every month diverse sequentially got better I think in the I think in the fourth quarter. The <unk> were up 6%.
Coincidentally, our baby apparel sales in the first quarter were up 6% I don't know if there was a connection or not.
But thats a reversal of what I would say it's been a 14 year declined inverse in the United States. There was a peak number of beautiful babies born in $2074 3 million children, born and then with the great recession almost every year since the great recession began in 2008 theres been a decline in person.
Again, the government four three trillion dollars into the economy, a year ago. A good portion of that was focused on helping families with young children.
There was a.
View, what would happen during the pandemic some of the hand, ringers said that there could be as much as 500000 fewer births last year first were actually up in 2021. So the outlook for <unk> is good hopefully it's sustained how do we model that we really don't we focus on the strength of our product offerings marketing strategies strength of the relationship.
We have with the winning retailers what we think is possible our direct to consumer business, but that's a very positive reversal of what had been a 14 year decline in births in the United States. So we're encouraged by it.
Great. Thanks Best of luck, thanks very much.
Thank you we have a question from Ike <unk> with Wells Fargo.
Your line is open.
Hey.
Good morning.
Could you guys.
Help us out a little bit more on the Easter shift.
Historically, it's been around a high single digit percent of revenue.
<unk> quarter to quarter is that similar to.
What's happening this year Q1 to Q2.
Yeah, we modeled at about $10 million in our retail business.
Got it I guess, what my question is based on the quarter to date guidance I guess down one to get to the up low single. It just seems like you are baking in a pretty meaningful acceleration in may and June because ship.
<unk> adjusted the comps are more like down 10, So I guess I'm just trying to think of it just warmer weather is there something else that gives you the confidence that youre going to see that kind of a meaningful acceleration in the back half of the quarter Im just trying to piece together whats going on right now with what your expectation is the remainder of <unk> and retail.
We're trying to read the business, obviously everyday as I commented before I think we have not seen that whether pop number one number two is we try to read the stimulus from last year and how much that impacted our business in March and in April and I think that there was there was clearly an impact comping up against that in March and probably more than we maybe anticipated in April so between those two factors.
Yes.
We continue to monitor the business and we're optimistic that we.
We will see the turn but it but it's early and we're planning low single digit comps for the rest of the year and the rest of the quarter and we'll see how that materializes.
Okay.
And then.
<unk> is where the weather has turned which is not many places by the way we have seen good business, we've had some significant improvement, particularly some.
Factors in the south and the west have really gotten materially better.
Understood.
Richard on the cash flow guidance.
Get down $50 million.
Curious everything else is maintained on the P&L in terms of EBIT sales and everything so what would drive the 50 million reduction in operating cash flow versus three months ago.
I think on balance, it's just being a bit more conservative on the inventory as we've commented we're bringing inventory in advance of good plant demand and also trying to mitigate some of these transportation delays. So my guess is we will be a little heavier on yearend inventory than than we had expected to be in our first forecast and I think that'll be a good thing because.
We'll have the inventory on hand to do the business that we were planning on doing.
Got it thank you sure.
Thank you. Our final question comes from Tom <unk> with Wedbush Securities. Your line is open.
As a remainder here on for Tom just a quick one.
I know you guys said you had great rates locked in through first half of 'twenty three I know, we're a long way out, but we'd have to see spot rates start to recede should we assume that we'll see more increases in freight costs late next year as your contracts for a while.
Time will tell I don't think we have a crystal ball it takes us into the second half of next year time time will tell what we've been told by some of our largest freight carriers.
They expect that as capacity comes onboard things will start to moderate.
So we're just in a point right now were.
Demand continues to exceed supply so it's driven the rates rates up we feel good about the rates that we've locked in into albeit higher.
Negotiated at least with one of the major carriers.
Rates drop we have the flexibility we have in effect a variable to the good side the rates drop.
We will benefit from lower rates than we've locked into right now so.
Our best outlook is through the first half of next year with some indication from the people we've been negotiating with that they expect because they are the experts.
That they would expect that rates have the potential to moderate starting in the second half of next year, but time will tell.
Got it. Thank you very much you are welcome.
Okay.
Yeah.
Thank you and that's all the time, we have for questions I would like to turn the call back to Mr. Mike Casey for closing remarks, great. Thank you. Thanks very much. Thank you all for joining us on the call today look forward to updating you again on our progress in July Goodbye everybody.
This concludes today's conference call. Thank you for participating you may now disconnect.
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