Q2 2022 Carter's Inc Earnings Call
Welcome to Carter's second 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 Chief operating Officer, and Sean Mchugh, Vice President and Treasurer.
After today's Brent excuse me after today's prepared remarks, we will take questions as time allows.
Carter's issued its second quarter fiscal 2022 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.
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 companies we.
We reference various non-GAAP financial measurements, a reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials.
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.
Earlier this year on our February earnings call, we reported a strong recovery from the pandemic in sales and a record level of earnings in 2021.
Our progress last year, indicating that consumers were also recovering well from the pandemic the job market was improving and wages and savings were rising children were returning to school and people were traveling again reconnecting with families and friends more weddings, where being celebrated in the trend in births was improving.
On our February call. We also shared our outlook for growth with you. Our plan. This year envision another good year of growth building on the strong recovery and record earnings we achieved in 2021.
In February our year to date comparable retail sales in the United States were up 7% the year was off to a good start.
On our more recent earnings call in April we reaffirmed our outlook for growth this year.
And the other things we noted on that call that our second quarter was off to a slow start our.
Our plan envisioned a better contribution from the late Easter holiday in April .
Our comparable retail sales in April were down 1% and then in May and June the trend in our retail sales weakened.
It is increasingly clear that the strength of the market has changed since the beginning of the year.
Post pandemic optimism, we all experienced last year has been disrupted there.
There are new challenges weighing on the consumer and our results.
Our best analysis suggests that the trend in our second quarter sales correlates to the declining trend in consumer confidence during that same time period.
In the second quarter media reports highlighted the new and heavy burden on consumers weighed down by the surge in gas prices, a 41 year high and inflation affecting food prices shortages of baby formula and rising interest rates.
Our target consumers or parents of young children men and women generally under the age of 40, it's fair to say that segment of the market has never before experienced the scope and impact of the recent collective disruption in their lives.
Earlier this week the conference Board reported that consumer confidence fell again in July to the lowest level. Since February of 2021. It was the third consecutive month of declining confidence in the state of the U S economy.
And that same report consumer expectations for the next six months fell to the lowest level in nearly a decade, suggesting weaker growth in the second half.
Our lower performance in the second quarter was largely related to our U S retail segment by.
By comparison, our U S wholesale sales were slightly lower than last year and reflect a decrease in sales to off price retailers.
Our international sales grew 7% in the quarter. It is the only segment of our business that did not benefit from the government stimulus last year.
In our retail segment, we had forecasted low single digit growth in comparable sales in the quarter driven by the late Easter holiday and the strength of our spring and summer product offerings.
Our actual comparable retail sales in the quarter were down 8%.
We achieved our pricing objectives in the quarter, which fully offset higher product costs, but unit volume declined.
To date, we have seen no resistance to our high single digit price increases this year, which equate to less than $1 per unit.
Customer satisfaction ratings on our value proposition remain high.
With a stronger mix at a level of inventories relative to last year, we expect to achieve our pricing objectives in the balance of the year.
And our U S E Commerce business, which has historically been our fastest growing highest margin business. We saw high single digit decline in traffic to our websites.
By comparison traffic to our stores in the second quarter was only slightly lower than last year.
We expected growth in e-commerce to be more challenging in the first half this year.
We're comping up against a 43% increase in ecommerce sales last year comping compared to the first half of 2019.
We believe 2019 is a better base here for comparison, it was unaffected by the pandemic and related stimulus payments.
Relative to the pre pandemic period, Carter's is a fundamentally stronger and more profitable company relative.
Relative to 2019, our U S retail earnings in the first half of this year are up over 40% and.
And our consolidated earnings per share in the first half are up over 60% compared to the first half of 2019.
Our growth in profitability compared to 2019 reflects the structural improvements in our business made over the past two years, including the reduction of low margin product choices.
Closure of less productive stores investment in inventory management and pricing capabilities reduction.
The reduction in promotions and improved price realization.
For the year, we're now projecting our U S retail sales down about 10% to 2021, we are assuming the current run rate may continue through the balance of the year.
Retail earnings are expected to be about 25% lower than the record profitability achieved last year, largely due to lower sales and expense deleverage.
Relative to 2019, we're projecting our retail segment profitability this year up over 20%.
For the balance of the year, our retail team has curtailed inventory plans and reined in discretionary spending.
We plan to continue leaning in and investing in the capabilities that provide a better experience for consumers shopping with us, including new stores located closer to their homes.
He's of shopping online.
And speed of delivering online purchases, including the convenience of same day pickup and curbside pickup which became popular during the pandemic.
We believe these investments will strengthen our share of the market when the current burdens weighing on consumers subside in the post pandemic recovery resumes.
Given our progress improving price realization more attractive store opening opportunities are available to us nearly 70% of children's apparel is purchased in stores and our stores are our largest source of new customer acquisition.
We expect to open 100 or more stores net of closures in the United States by 2026, including 30 store openings in 19 closures this year.
Our new stores have been achieving our investment objectives and provide a high return on investment.
Our stores increasingly provide a high higher service level to consumers shopping online with us over 30% of our online transactions in the first half were fulfilled by our stores over.
Over the next four years, we expect our stores to support 40% or more of our online transactions. These are margin accretive transactions.
Those who shop online and in our stores are our highest value customers. They have the highest satisfaction rates shop more frequently and spend spend three times more than those who shop only in our stores or online.
We are the largest specialty retailer of young children's apparel in North America and have the highest rated in store and online shopping experience in kids apparel.
We believe our stores provide a better presentation. The best presentation of our brands and inspire our wholesale customers to strengthen their presentation of our brands in their stores and online.
Our exclusive brands continue to be the strength of our U S wholesale segment growing to over 50% of total wholesale sales in the quarter.
With the surge in gas prices consumers may be consolidating shopping visits with retailers that provide one stop shopping for essential core products.
No other company in young children's apparel has the scope or depth of relationships that Carter's has built with the largest retailers in the world.
In the weeks ahead, we plan to relaunch our brand marketing with target and Walmart during the back to school season.
Our marketing team has worked collaboratively with target and Walmart to refresh our branding and nearly 6000 store locations and on target Dot com and Walmart Dot com.
Every week over 100 million people shop in target and Walmart stores.
We expect that those shopping for young children's apparel will begin to see a stronger presentation of our Carter's brand in those stores in the second half this year.
We saw good demand for our simple joys brand in the second quarter driven in part by the timing of Amazon's Prime day marketing event and.
In its recent Prime day press release, Amazon highlighted our simple joys brand as one of its top selling product offerings during its signature marketing events.
In the quarter, we saw lower demand in our core Carter's brand sold through department stores clubs and off price retailers. Some of our Carter's brand customers have been disproportionately affected by the shift in consumer demand to target Walmart and Amazon during the pandemic.
Since the pandemic began we believe our customers have planned inventory commitments more conservatively given the challenging market conditions.
By running leaner on inventories many of our customers margins are better than 2019.
For the year, we now expect our wholesale segment sales will be comparable to last year with good mid single digit growth in our exclusive brands.
Offset by a mid single digit decrease in our Carter's brands.
We saw good growth in our international segment in the second quarter, our growth was driven by our operations in Canada and Mexico in expansion in Brazil, with our partner <unk>.
We have the number one market share in young children's apparel in Canada, Mexico, and now Brazil.
The balance of our international sales are driven by wholesale relationships with nearly 40 retailers in over 90 countries selling our brands through over 1200 points of distribution and 100 websites globally.
Our operations in Canada contributed the largest component of our international sales and profitability, Canada is rolling out RFID capabilities in the second half this year.
RFID enables better visibility to inventories, which enables us to provide a higher service level to online shoppers, including the same day pick up their purchase in our stores, it's a margin driver and enables higher sell throughs and better price realization.
In Mexico, we are converting all of our stores to the co branded model replicating the successful strategy. We executed initially in Canada years ago, and then the United States.
Over the next five years, we plan to Triple our retail stores square footage of Mexico by opening co branded stores and converting our smaller single brand stores to the more productive co branded store model.
For years, our Carter's branded so well selling through <unk> department stores in Brazil that we partnered with them on a new growth strategy, which enables reassure allowed to open Standalone Carter's stores.
They expect to have some portion of 50 Carter's stores opened by the end of the year, Brazil has been a fast growing and profitable component of our international segment.
For the year, we now expect international sales to be comparable to 2021 sales in Canada slowed in recent months similar to our experience in the United States and some wholesale customers have adjusted their growth plans for the balance of the year.
The stronger U S. Dollar is also expected to weigh on international growth. This year on a constant currency basis, we're forecasting low single digit growth in international sales this year.
And our supply chain on time deliveries have improved though not yet back to pre pandemic levels.
Paul deliveries this year are expected to be about 80% on time the balance running on average a few weeks behind that's the best performance, we've seen since the pandemic began.
Thankfully the Lockdowns in China. This year have not had a material impact on the timing of production or shipments.
A year ago, we were already shipping 50% on time due to the supply chain delays both in factories <unk> port congestion.
Congestion in the United States continues to cause delays, we have routed over 60% of our shipments from Asia to the east coast. This year to mitigate the risk of prolonged delays and labor disputes on the west coast.
The East Coast continues to be our preferred entry point, given the closer proximity to our Georgia based distribution centers.
We're encouraged by recent meetings with our largest suppliers in Asia.
Common themes expressed by our suppliers suggest that capacity is opening up in Asia as global demand has weighed down by inflation input costs are trending lower more containers are available to get product on its way to the United States and ocean freight rates have trended lower every month over the past six.
Months.
Their views are consistent with our data.
Cotton prices and ocean freight rates are each down over 30% from recent highs. These are significant input cost together with available manufacturing capacity. We believe these improving trends may enable more stable product cost for Carter's beginning in the second half next year.
Inventories will be elevated this year for two primary reasons, we ordered product earlier to improve on time deliveries for the back to school and holiday seasons, and we are packing and holding inventory given the slowdown in demand we've seen in recent months Richard I'll share more about this margin preservation strategy with you.
This morning.
Based on changing market conditions, and our second quarter results and third quarter trends, we have revised our outlook for the year. Our consolidated sales. This year are now expected to be down about 5% given the trends in our retail business and the risk of lower wholesale demand.
Earnings per share are also expected to be down about 5% driven by lower than expected demand and higher inventory provisions.
Relative to the pre pandemic period earnings per share. This year are expected to be up about 18% compared to 2019, given the structural improvements made to our business during the pandemic.
We expected a tougher comparison to the nonrecurring benefits of the unprecedented three trillion dollars government stimulus in the first half of 2021, a good portion of that stimulus helped to families with young children recover from the pandemic.
While we did not expect where the adverse effects of the absence of that stimulus combined with a historic surge in gas prices inflation and interest rates.
We also did not expect the related and sharp decline in consumer confidence.
With time, we believe market conditions will improve they always do over the past 15 years. Carter's has worked its way through the financial crisis. The great recession that followed the cotton crisis and the pandemic.
In every case, our employees worldwide used those periods of disruption to strengthen our company and emerge stronger from them.
Our employees enabled 31 consecutive years of sales growth prior to the pandemic and they are committed to work their way through this latest challenge with their support we will continue to make Carter's is the best in class in young children's apparel.
There are potential upsides to our latest forecast, which may be driven by a better mix and level of inventories relative to last year.
A year ago, 50% of our fall and holiday product offerings arrived late <unk>.
Last year some of our product offerings arrived incomplete, we had ordered beautiful matching outfits and many did not match. Many tops arrived without bottoms bottoms arrived without the matching tops.
Some product offerings arrived solely we missed the selling window and some other product offerings never arrived at all.
By bringing product in earlier this year, we plan to provide a much better experience for consumers in the second half, which may drive higher sales and forecasted.
Baby apparel was the strongest performing product offering in the first half baby apparel is the largest component of our wholesale product offerings and a high margin replenishment program for our largest customers.
Thankfully birth trends are improving the latest data available is through the first quarter of this year when births in the United States grew 4%.
That's the fourth consecutive quarter of growth in births reversing a nearly 14 year decline in annual births in the United States.
With a near 40 year high and weddings expected. This year hopefully family formations will follow in the improving trend in first we began to see last year may continue this year and in the years to follow.
And we believe more children are returning to in school learning. This fall that May also provide better back to school selling than forecasted.
In summary, we have risk adjusted our forecast to reflect what we've experienced in recent months and what we now believe is possible this year.
We will continue to focus on what we can control and we plan to mitigate the risks related to the current market conditions.
Carter's has built a resilient business model focused on young children's apparel, which is a less discretionary product category. Our brands are focused on essential core products that consumers purchase frequently in the early years of a child's life.
<unk> is not immune from the current market headwinds, but as we've seen in years past, we believe the strength of our brands and our multichannel business model may enable us to weather the latest storm better than most and recover more strongly from it.
Richard will now walk you through the presentation on our website.
Thank you Mike good morning, everyone.
I'll begin this morning on page two of our materials with our GAAP P&L for the second quarter.
Noteworthy on this page our reported pre tax income of $47 million reflects a $20 million charge related to the early extinguishment of debt as.
As we told you on our last call, we retired $500 million and pandemic related financing in early April .
$20 million charge represents largely the early call premium and May call interest as this debt was not set to mature until 2025.
We've treated these debt extinguishment extinguishment costs as non-GAAP adjustments to our second quarter results.
Beyond this item, we had no other adjustments to our GAAP results in the second quarter.
Our first half GAAP P&L is included for your reference on page three.
A full summary of our non-GAAP adjustments for the second quarter and first half as compared to last year is included on page four.
In last year's second quarter, and first half we had some modest charges related mostly to restructuring and COVID-19 related expenses.
The remainder of my remarks, this morning will speak to our results on an as adjusted basis.
On page five we have an overview of our adjusted results for the second quarter.
Our second quarter performance was clearly below our expectations largely due to lower top line sales, which were $701 million, which was 6% or $46 million below last year.
The most significant driver of our lower year over year sales was our U S retail segment, where sales declined $45 million versus last year.
We attribute this decline in retail to several factors, we had a challenging comparison to last year. When the government was making extraordinary stimulus payments to consumers in response to the pandemic.
And also we saw a meaningful trend change in demand as we moved through May and June corresponding to the spike in gas prices and the overall decline in consumer confidence.
We saw a slight decline this quarter in our U S. Wholesale segment sales of 3%, which was largely offset by 7% growth in our international business.
Our profitability in the quarter declined driven by the lower sales and higher inventory related provisions.
Our adjusted operating income was $75 million in the quarter and adjusted EPS was $1 30.
Q2, EPS decreased less versus last year than operating income dead EPS benefited from lower debt outstanding a lower effective tax rate and a lower average share count due to our share repurchase activity both in 2021 and this year.
We have summarized our first half performance on page six.
We had a good first quarter, which exceeded our expectations and now our second quarter, which was below what we thought possible a few months ago.
It's worth noting that our profitability in the first half was up meaningfully over 60% versus the pre pandemic period in 2019.
As Mike highlighted we have made a number of structural improvements to how we manage the business, which we believe have strengthened accompany these improvements are proving even more important in an environment, where overall market demand is lower than we expected it to be.
To provide a little more color on our second quarter performance I'll turn to our adjusted Q2 P&L on page seven.
On the roughly $700 million in net sales in the quarter. Our gross profit was just over $330 million, representing a gross margin rate of 47, 3%.
Of the $38 million decline in gross profit from last year $23 million was from lower sales volume and $15 million was due to lower gross margin rate.
Gross margin was negatively affected by inventory provisions in the second quarter, which were $14 million higher than last year.
Additionally, in the second quarter last year, we had favorable adjustments to inventory reserves, which did not repeat this year.
Importantly, we continued our progress in improving price realization in the quarter offsetting the increase we saw in product costs.
Additionally, like most in the industry, we've seen a significant increase in ocean freight rates to bring product into the United States from Asia.
These rates were up nearly 90% over a year ago.
There was a benefit in the quarter from spending less on airfreight, but the impact of the higher freight rates was more significant.
We're expecting that the impact of the higher ocean freight rates will moderate a bit in the second half.
In the latter half of last year, when we saw rates really began to spike.
We were also spending heavily on airfreight to expedite delayed product in the second half of last year, which we do not plan to repeat this year.
Overall, we're planning gross margin expansion versus 2021 in the back half of the year given the anticipated decrease in transportation costs continued progress in price realization and an improved mix of our high margin retail sales, especially in the fourth quarter.
Our spending in the second quarter was well controlled down 1% compared to last year.
While variable spending such as e-commerce fulfillment costs was lower we deleveraged other costs because of the decline in net sales.
Importantly, we've continued to invest in building our capabilities in areas, such as pricing marketing personalization and technology.
All of this translated to operating income in the quarter up $75 million.
As I've mentioned, we had some favorable factors below the line our interest costs were lower as we retired the pandemic related financing.
Our effective tax rate was 21, 5%, which was 160 basis points below last year, which reflects our forecast that a greater proportion of our profitability will be outside the U S. This year.
<unk> also completed a meaningful amount of share repurchases in the first half of the year retiring about 5% of the shares which were outstanding as of the beginning of the year.
So on the bottom line adjusted earnings per share were $1 30, compared to $1 67, a year ago.
Our adjusted P&L for the first half is included on page eight for your reference.
Some highlights of our balance sheet and cash flow are summarized on page nine.
Overall, our balance sheet is in fine shape, we continue to have substantial liquidity.
$1 billion with cash on hand, and the vast majority of our $850 million.
Got it.
To us.
We de Levered, our balance sheet significantly in the quarter by paying back the $500 million and pandemic related financing, which Fortunately we never needed.
This debt repayment will save us nearly $30 million annually in cash interest cost will have a full year benefit of these interest savings in our P&L next year.
Our Q2, ending inventory was in line with our plan and I'll speak more about inventory in a moment.
Our first half cash flow was lower than last year as a result of the factors summarized on the right side of this page.
For the full year, we're now expecting that will generate operating cash flow in the range of $125 million to $150 million.
As demand and inventory levels normalize we would expect that the business will return to its historical pattern of significant cash flow generation.
For reference in 2019, our operating cash flow was nearly $390 million.
Our share repurchase activity, which I've already mentioned is summarized at the bottom of page nine.
Yes.
So onto inventory on page 10, our inventory at the end of the second quarter was $858 million up 39% versus this time last year.
While a meaningful increase we had planned inventory to be up about 40% year over year, despite sales being lower than planned. Some production was delayed at the end of June which benefited our quarter end owned inventory balance.
Overall about 75% of the growth in inventory was by design, we had intended to bring product in early because of the tremendous delays the entire industry faced last year and getting productivity U S from Asia.
And product costs are up as expected and this is additive to our inventory balance.
Inventory management has always been a focus for us on progress in this area has accelerated over the last couple of years.
We have taken steps to respond to the historic disruption of the pandemic.
Our priority is to maximize the return on our investment in inventory. We have historically made only modest use of the off price channel to deal with excess inventory.
And we don't have plans to change that.
Given the lower outlook for consumer demand, which has unfolded thus far in 2020 we've.
We've taken meaningful steps to align our inventory amendments with our revised sales forecast.
Where appropriate we have canceled certain production planned for later this year.
In response to the pandemic and broad market disruption in 2020, we packed and held over $100 million of inventory product, which is now fully sold through at good margins to a much lesser extent, we also designated some inventory of pack and hold last year.
We are reprising that strategy in 2022, largely for fall and winter product previously earmarked for our retail stores and website and for some wholesale customers.
For the portion of pack and hold inventory relating to wholesale we made these decisions proactively and in collaboration with our wholesale customers. Our customers have been very supportive of these actions as they've seen the same trend change in consumer demand.
Retailers are also actively working to better align their commitments with their revised outlooks for the second half.
While not without some cost and complexity, we have wherewithal to hold this inventory and give ourselves the opportunity to earn a good return on this investment versus simply liquidating at whatever price possible.
Our forecasts indicate that we've hit the peak year over year growth in inventory with lower growth expected in each of the third and fourth quarters.
Beginning on page trials, we have some additional information on the performance of our individual businesses in the second quarter.
Overall against last year's record performance, which was fueled in part by the significant government stimulus and recovery from the pandemic are operating margin declined from 14, 8% to 10, 8%.
We saw lower profitability in our retail and wholesale segments with some sales and profit growth achieved by our international business.
On page 13, we have the second quarter of 2022 data, but the comparison is to the second quarter of 2019.
While the current challenges in the retail marketplace are significant Carter's is a stronger business than it was just a few years ago.
<unk> benefited benefited from the structural improvements that we've talked about which have had an overall emphasis on improving profitability.
Our retail and international businesses are more profitable than back in the pre pandemic 2019 period wholesales profitability was disproportionately impacted by the inventory charges, we have discussed.
Turning to page 14, we'd have some additional color on each of our businesses and their performance in Q2 and retail sales decreased 11%.
We've covered what we believe to be the drivers of our lower retail channel sales in the quarter, which are summarized again here on this page.
We saw lower sales in both our stores and ecommerce channels with a total decline in comparable sales of 8%.
We had planned a low single digit increase in retail comps for the quarter.
We did not see a meaningful difference in our performance by geography, which further reinforced that the consumer has broadly pulled back on their spending.
We continued to make progress in improving our realized pricing in the quarter in our retail channels, which was an important objective because product costs were up as expected in the second quarter.
Given the fixed cost structure of the retail business, we did not leverage spending in the quarter, which affected the operating margin for the retail segment as did some higher costs related to marketing transportation and retail share of the higher inventory provisions, which we took.
And wholesale sales were down 3% versus last year sales.
Sales of the exclusive brands grew in total in the second quarter, continuing their momentum and Thats part of our business.
We had lower sales than the core Carter's brand later, writing product continued to be an issue in Q2, which was compounded by the decline in consumer demand, which unfolded during the quarter.
Some shipments to customers, which had been planned for the second quarter were deferred as we made decisions to pack and hold certain inventory as I've discussed.
Operating margin in wholesale was affected by the same factors as in retail, namely higher ocean freight rates and inventory provisions.
Offset somewhat by lower cost per airfreight and compensation.
International was a bright spot in the quarter sales grew 7% over last year on a constant currency basis international sales increased 10%.
Our Canadian business held in well until the final weeks of the quarter. When some of the same demand and inflation pressures began to weigh on traffic and comps. Despite this we posted a high single digit increase in total retail comp sales in Canada.
We saw particular growth in Q2 from our international partners wholesale business our partners around the World continue to show a strong recovery from the significant disruption they suffered during the pandemic.
We continue to see significant demand in particular in Brazil, where our partner there is rapidly expanding the presence of the Carter's brand in this market.
Turning now to some of our marketing initiatives beginning on page 15.
In May we announced a very unique collaboration with Hilary Duff who is extremely popular among millennials.
He has a tremendous following among young moms and more broadly across social media and the entertainment industry.
As our Chief <unk> Officer, Hilary has helped us in the annual refresh of our core baby essential products. My first love and just this week participated in a sneak peak of our holiday pajamas for our Christmas in July event.
This also unveil a beautiful collection of products on which she has collaborated with our talented internal team of designers and merchants.
This collaboration with Hillary is a great example of the creativity and innovation of our marketing team and strengthening our connection with today's parents.
On the next page, we're approaching the back to school season, which is an important shopping periods for both the Carter's and Oshkosh brands. We're hopeful for a strong back to school season with more kids returning to in person learning than in the last couple of years.
Our marketing features some great looking kids wearing carter's and Oshkosh clothing, which generations of parents have come to trust for value quality and style as they stock up for their kids return to the classroom.
On page 17, as we've shared on past calls Carter's plays a unique part and how families celebrate holidays and special occasions.
And Christmas had been among the most search terms on our web site. This summer.
Our Christmas Pajamas have become a holiday staple as families gather to celebrate together.
On the next page, we're continuing to see good demand for our eco friendly little planet brand. This year will be a key area of growth for little planet, We will expand the brand's nearly 800 stores in the U S and Canada between our Carter's stores and the stores are some of our largest wholesale customers such as target Amazon and calls.
On page 19, we continue to lead the market in social media engagement with consumers. Our teams are constantly innovating and our social media efforts to keep our content fresh and interesting most.
Most recently, we've added videos, featuring our merchants highlighting new products as well as in store shopping videos, featuring our store associates.
Also featured Hilary Duff and some behind the scenes content from her recent photo shoot with us for fall and holiday.
On the next two pages.
As you know we've had tremendous success with the growth and performance of our exclusive brands just one year at target and child of mine at Walmart.
This fall, we'll be Relaunching the brand marketing for these two brands in store and online with these important retailers.
Through this initiative, both target and Walmart Walmart prominently feature Carter's, which is the best selling brand in young children's apparel.
On page 20, we have how the new branding, we'll look at target. This new just one new branding will launch in nearly 2000 target doors and on target Dot Com in August .
And on page 21, we have the new branding for child of mine consumers will see this new branding and nearly 4000, Walmart doors and on Walmart Dot Com also in August .
Overall this effort reinforces the very unique and powerful distribution in the Carter's brand enjoys in the wholesale channel. In addition to these roughly 6000 target and Walmart doors consumers can find carters and an additional 13000 retail doors across across North America.
On page 22, Amazon recently held its signature Prime day event as Mike mentioned, Amazon highlighted simple joys as one of the top performers on Prime day.
Our strategy at wholesale has always been to have a presence where parents are shopping and we continue to grow simple joys on this important shopping destination.
On the next page calls continues to lead in its presentation of our core Carter's brand. We recently launched our annual refresh of our core baby assortment My first love at calls.
We've been partnering with calls on its digital marketing efforts, which are focused on attracting the valuable millennial customer.
We are also increasingly partnered with social Influencers to further increase awareness of the Carter's brand at Kohl's.
On the next page Mike commented on our progress in developing the Carter's brand in Brazil, with our partner Ria Swallow. This photo shows some of the beautiful new Carter's stores, which have opened recently in Brazil.
We look forward to sharing our continued progress in this important market.
Turning now to our outlook for the balance of the year beginning on page 26.
It's difficult to forecast our business in light of the current volatility in the market.
As we heard from Walmart earlier this week consumers clearly continue to struggle with the higher high current prices of essentials like gas and food.
Combined with our experience in the second quarter has led us to lower our outlook for sales and earnings for the balance of the year.
As we've discussed we've taken steps to better align our inventory commitments and discretionary spending with our revised outlook for topline sales.
On spending we produced over $100 million of previously planned spend across the company for the balance of the year.
There are a number of factors, which we find encouraging as we assess the performance that may be possible in the second half of the year.
First we expect our inventory position to be in much better shape than it was a year ago in both retail and wholesale we believe we left a good amount of business on the table last year simply because we didn't have enough product on hand.
This year, we expect to be in a much better position to support key holiday promotions and events. We also don't expect to spend the historic amounts on airfreight, which we incurred last year to expedite delayed product.
We believe the strength of our merchandising branding and inventory management initiatives will facilitate continued progress and improving price realization in the second half.
Our forecast reflects gross margin expansion and SG&A leverage in the second half of the year.
And below the line our second half forecast reflects lower interest expense and the benefit of our cumulative share repurchase activity.
Q4 will drive our earnings growth in the second half in part due to significant provisions for compensation and charitable giving made in last year's fourth quarter, given our record performance in 2021.
In terms of our specific expectations on page 27 for the third quarter, we expect sales in the range of $850 million to $865 million and operating income in the range of $90 million to $100 million.
And adjusted EPS of $1 50 to $1 70.
For the full year.
Projecting net sales of $3 5 billion to $3 $301 billion at.
At the high end of this range if we're successful in achieving our forecast we would maintain roughly 95% of 2020 one's net sales.
We're expecting full year adjusted operating income in the range of $415 million to $440 million, which implies an adjusted operating margin in the range of 12 eight to 13, 3%.
We are forecasting adjusted EPS in the range of 710 to 760.
While our comparisons to 2021 are not what we had originally planned we have included the relevant 2019, Comparables here, which show that we have made meaningful progress over the past several years in improving the profitability of Carter's.
And with those remarks, we're ready to take your questions.
Yeah.
Thank you and as a reminder to ask a question simply press Star one one on your telephone.
One moment for our first question.
Our first question is for Tom Nick <unk> with Wedbush. Please go ahead. Your line is open.
Hey, good morning, Thanks for taking my questions.
Okay.
At a high level.
Correctly.
Business has been fairly recession resilient.
Especially when you look back at the helm.
2008 recession, where.
You are.
Pretty consistent and continued to grow sales.
Got it.
Kind of wondering what's different.
At this time why do you seem to be for.
Affected by macro factors.
Yeah.
Got it.
Kind of wondering whats different.
At this time why do you seem to be for.
Affected by macro factors.
The external environment.
I think settled environment.
Whereas in the past you've tended to be more volatility.
Your recollection is correct during the recession, great respect during the recession, great recession, we had good solid mid single digit growth.
But with OA.
<unk> 2010 was a record year of profitability for us.
And I think what's different this year I think everybody.
I'll speak for our at least for our market primary market the United States I think we saw last year in 2021, a very strong recovery from the pandemic there with this post pandemic optimism that the world is going to be better there were some reports to say that our country potentially could have.
Something equivalent to the post World War two recovery in the market in the world and so we saw.
Our business rebound very strongly in 2021, even though early part of this year was off to a very good start comps were up 7%. The year was underway I think what I think what is different about this year relative to.
The last recession is the shock that consumers have with the historic gas prices did you ever think we'd be spending $5 to $7 a gallon for gas in the United States.
And so in there is there is no indication that that's going to get better.
In the balance of the year and that combined with the historic inflation and then think about our customer base can you ever recall a time in our country's history, where there has been a shortage of baby formula. So you had this kind of this combination of these factors weighing on the consumer that we began to see in May June it's continued in July .
Is that the consumers weighed down by these.
Very abnormal factors that they have never experienced before and that coupled with that we were we were entering what we all thought was a period of.
Prosperity.
A new time after.
A period of isolation for some portion of two years that people were getting out and about again in 2021, the holidays for us in 2021 were terrific.
So it's I think that's what we saw in May and June and to some extent continue continued in July is that theres a bit of a shock that the consumers at least in United States have never experienced before that together with other global events. So I think there is a I think we're in a different environment today than we were during the last recession.
Understood.
I pulled out my gas tank for four offset that.
Yesterday, so hopefully we are trending in the right direction I hope so yes.
Best of luck.
Thanks, very much the environment improves.
Thank you.
One moment for our next question please.
Our next question is from Warren Cheng with Evercore ISI. Please proceed.
Hey, good morning, guys good morning.
Good morning.
This is partners Walmart and target they've made some pretty well publicized comment about the demand and inventory the traffic and inventory challenges they've seen especially in June and July .
Can you give us an update on how those challenges are affecting your business or why you seem to be more insulated because I did notice your.
Our exclusive guidance.
So it's up mid singles for the year.
Brian Yes, our exclusive brand business has been very good and just the overall, but just give you some texture over wholesale business again as Mike said, we're planning the full year comparable.
To last year, we're going to have growth with four of the top six accounts.
Originally planned it up mid single digits and our Upfronts. Our bookings were good we had a mid single digit increase but we did have some product delays and the retail selling softened as we went through the quarter. The over the counter selling did soften at our top accounts sequentially. As you went through the second quarter. So that created the need to proactively pack and hold inventory.
Our cancellations have generally been in line with our expectations, but the inventory at our accounts overall is in pretty good shape. It's up low single digits. We do not have an inventory issue at the exclusive brands. We obviously have great relationships with those folks and we've read their public comments, but I feel like we're in good shape, there, even even Walmart inventory is actually lower than last year or so.
We had bookings to support the second half up mid single digits now, we're planning down low single digits, but we will we will have good growth for the year with the exclusive brands.
<unk>.
We're going to have I think even if you look at the second half I think we will have outsized growth in the third quarter, because we're up against some significant lost sales we had in the third quarter of last year. When we had some shipping issues. So we're optimistic that our improved shipping performance should help early fall selling this year and I expect it will continue to have good good strength.
Exclusive brands that their teams are very talented teams at those accounts and our teams have great relationships and manage that business very well.
I would just add to that it's important for you to know that a target and Walmart a very high percentage of the product offerings, we sell into those two retailers as baby apparel, our baby apparel business is over 50% of our total apparel sales.
That has been the strongest component of our business and in baby apparel, a good portion of what we do for target and Walmart is an automatic replenishment. So as the register rings. It triggers an order that we sent to those two retailers if they turn off that replenishment. The shelves are empty and thats not going to be a good experience for the consumers and the balance of the year.
So baby apparel, the essential core products.
Bodysuits wash cloths towels bibs blankets, all the pajamas all the things that a child grows through through rapidly in those early years of life. So that's why I think we've done so well at target Walmart and Amazon because a very high percentage of the product offerings for those retailers is in baby apparel.
Got it thanks, that's really helpful insight.
And then my follow up can you help me better understand the divergence, we're seeing between retail and wholesale retail wholesale segment. This year.
I better understand the first half.
Things change pretty quickly so retail performed but the guidance seems to imply kind of that same gap in the second half. So can you just give your thoughts there and then how to think about that progression and mix going forward.
There's a few things first of all as timing as I said.
Our direct to consumer business. We saw this this impact pretty quickly when the guests and inflation took hold as Mike said. So we saw that directly then and in wholesale we were still shipping product and we werent talking about sell through as I said before the the over the counter selling over the counter selling I should say at the wholesale accounts did declined 6% sequentially during the quarter and we.
We have revised the second half so our wholesale business, we had a good business in the first half overall, but the second half's going to be down mid single digits.
There is there is diversity, but not the gap isn't what it was in the first half.
And the only thing I would say is again, we just talked about exclusive brands that it is a different business, we sell to people. Some of the key accounts, we talk about the biggest retailers in the country. There is such a retailers or sell groceries and other items and so I think theres, a theres a lower impact of them on traffic and other things than there are for instance, in the department store channel or in some of the specialty channels.
I would say in the stores the stores actually had pretty good traffic the best traffic to our stores, where we call our brand stores that are opened.
Closer to <unk>.
Consumers live in more densely populated areas, we still have about 30% of our stores and outlets and as we've seen in years past when gas prices spike.
Traffic to our outlet stores declines it settles it settles down when the gas prices settle down but the stores actually we were encouraged by the traffic to our stores E. Commerce was the one that surprised US we started to see some weakness.
In the quarter in ecommerce traffic, which was down high single digits and I think part of that is due to the fact that the stimulus lapsed that there was stimulus in the market significant stimulus is helping families with young children a year ago. So you have this.
Wonderful environment ideal for an e-commerce environment that most of US were still working from home in the first half of last year and you had the unexpected benefit of those stimulus payments, which drove very good growth in our ecommerce business.
Thank you good luck.
Thanks very much.
Thank you one moment for our next question. Please.
Yeah.
Our next question is from Ike <unk> with Wells Fargo Securities. Your line is open.
Hi, everyone and thanks for taking the question.
Two questions actually I guess on the wholesale side for flat for the year.
Exclusive up mid single digits I guess.
I'd love to get a little bit more color there.
Both of the exclusive brands.
When you are a child of mine in the mass channel, but a bit under pressure, but you're still forecasting pretty decent growth. There. So maybe just walk us through the puts and.
<unk> takes on wholesale and then there's a follow up is on <unk>.
<unk>.
Looks pretty reasonable when you when I look at the implied <unk>. It looks like margins are up in 17, and 18% and it just looks like you're embedding a nice inflection in margin and I'm just kind of curious differences between <unk>.
To understand how that.
How we should think about the margin differences between the two quarters for the rest of the year.
Wholesale.
It's Brian I think a couple of things on wholesale as Mike shared before exclusive brands.
Continue to perform well those are.
Our strongest businesses.
So it probably is for some of the strongest retailers out there overall they have been under pressure in certain components of their business as they reported but I think if you think about our business is a little bit different as Mike said, the majority of what we sell them as baby product, maybe product has performed better than playwear and sleepwear and other products as you go through the year.
What we sell them by and large are essential core products. So we love the business GBP, even better with them.
And there have been some challenges some inventory that we proactively worked with the amount of packing holders Youll pack and holding as you look through the back half of the year, but overall, we've had good performance and I think the two their companies in our group combined have done a really good job on inventory management and how we plan. This business out so it's not a significant challenge at this point.
It's not easy, but we're excited about having growth this year and as we look forward into.
Into the future we would expect exclusive brands that continue to be good growth vehicles for our company and we're excited about the marketing changes that Richard shared and we're going to have more prominent position I think on the floor on how we communicate our brands and reinforcing to the consumer that these great brands, our Carter's brands and 6000 stores and on their on their websites Richard Yes.
On the difference between Q3 and Q4, we are forecasting fourth quarter to be really the driver of earnings growth in the second half Theres, a number of things contributing to that.
We're expect we're planning on gross margin expansion and in the fourth quarter in particular, that's driven by a few things we're forecasting good improvement in price realizations of product margin is expected to be higher Q3 is a little bit on the gross margin line under a bit more pressure because of what Bryan said around wholesale is expected to have a very very strong Q3 <unk>.
<unk> period, so that flips around and retailers the bigger strength in the fourth quarter, we have an ongoing benefit on the margin line from spending less on airfreight. We spent those historic amounts last year, even though ocean freight continues to be a drag on margin it becomes less of a drag as we move through the year, particularly in the fourth quarter, and then that mix of retail jumps up in particular in the fourth quarter.
We had some extraordinary spending a year ago, which were not planning on repeating we had such a strong 2021 and a record year, we provided really extraordinary amounts for our people in recognition of that so are the various categories of performance based compensation much.
Much less than a year ago in the fourth quarter, we did some special things in marketing a year ago because of the upside we were experiencing we don't plan on repeating some of that marketing spend.
And then we made some special provisions for charitable giving that I don't think we will we will provide at the same level for us. So your observation is correct fourth quarter shows in our forecast as well as the stronger of the two periods and then of course below the line you have the ongoing benefits of the lower interest cost and the benefit of our cumulative share repurchase activity, which will benefit EPS.
Got it Super helpful. And then if I may just any initial visibility into first half 'twenty three order book or costs would also be interesting.
Yes, sure that I would say just given the uncertain macro environment. There have been corporate directives to remain lean on inventory with our top customers looking into spring 'twenty three we're still booking spring we have some of the early commitments in the accounts have accepted our pricing our costs are going to be up I think mid to high single digits and we've raised pricing.
Yes.
To match that and making sure that we cover those and so we're still booking were still book and exclusive brands. They book a little bit later, which has been a growth vehicle for us they represent about half the business.
And as I said, we're excited about the branding there but to all in first half we'll have to see it a little too early to call I would say, we could be under some pressure in the first half in wholesale primarily due to accounts that we saw the Carter's brand too, but it's kind of early to call. It because we haven't finished booking we have booked summer yet and we haven't finished the exclusive brands. So that we'll know more in October .
But we're encouraged by is that the wholesale customers continue to support our price increases.
I think they are supporting the price increases because they are seeing what we're seeing in terms of inflation into the first half of next year.
Thanks.
Thank you one moment for our next question. Please.
Okay.
And our next question is from Jay sole with UBS. Please proceed.
Great. Thank you so much Mike I just want to follow up on the comment you made that you mentioned the comp for April you said it slowed down in May and June and then.
The news here in July could you just give us an idea of maybe how much it slowed down in May and June what you see here in July and sort of what the guidance is based obviously is it based on sort of the total second quarter trend or is it based on what Youre currently seeing here in July .
More of what we saw in May June and July was double digit with Doug I'm rounding a downturn.
10, 10 again in May June and July so the trend continues so as we were trying to build the models for the balance of the year trying to ask ourselves. So when does this get better what changes in the balance of the year, our gas price is going to return to two to $3 a gallon.
<unk>.
And then with the recent news on the.
The contraction in GDP. So we just said.
Purposes.
Sharing with you what we believe is possible in the balance of the year.
We are assuming in retail at least that the current trends in our business continue because thats. What we are saying this is not the time to be bullish on forecast, we're going to tell you.
We're trending well assume those trends continue in the balance of the year that said I will tell you Jay that.
There is some optimism on our retail team as they reflect on the quality and the level of inventory going into the back half of the year and Thats true with back to school. So we're starting to get some early read on back to school and it's early but it's early and good.
And so we'll see whether or not the forecast.
As conservative but it's.
It's appropriately conservative given the trends that we've seen.
Since since may its been a meaningful slowdown.
In traffic.
We are assuming that continues through the balance of the year that said there are a number of upsides. We've shared with you. This morning that may.
Produce better results than that we're sharing with you today in terms of the forecast.
Got it and then if I can follow up on one more you mentioned that the supply chain.
Situations improved 80% of the fall goods have arrived on time does that mean that also that the lead times are shorter or is it just it's still taking longer accept things are arriving on time on that longer rate and then secondly, what has to happen to get back to a 100% or do you get back to where you were pre pandemic.
Well I think what we're dealing with.
From our suppliers.
They've been dealing with some level of absenteeism due to.
Still people are getting infected in Asia and.
But the trend is improving and how long will it take to get back to it in good years, we'd probably be shipping some portion of 95% on time as a matter of fact, the first love that Richard referenced are the core of our baby product offering that launched in may that shipped over 90% on time. So there are pockets of what I would say significant.
<unk> and so we're dealing with some factory delays and.
There was some impact of the China Lockdowns, our suppliers would say it was not significant but it wasn't it wasn't as if there were some component parts that they relied on from China that were running late and I'd say more of the issues.
Still the port congestion and I think with the world slowing down that we'll continue to get to get better.
Okay. Thank you so much.
Thank you and ladies and gentlemen, with that we conclude our Q&A session I will pass the call to Mr. Casey for his final thoughts.
Well. Thank you all very much for joining us. This morning, we look forward in October Goodbye, everyone Stober Goodbye everyone.
And this concludes today's conference call. Thank you for participating and you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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