Q1 2023 Carter's Inc Earnings Call
Yeah.
Welcome to Carter's first quarter welcome to Carter's first quarter fiscal 2023 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 Treasurer after today's prepared.
Remarks, we will take questions as time allows Carter's issued its first quarter of fiscal 2023 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.
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 material.
Posted on the company's website on.
On this call the company will reference various non-GAAP financial measurements, a reconciliation of those non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials.
Also today's call is being recorded and now I'd 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.
Carter's is off to a much better start this year than we planned we exceeded our sales and earnings objectives in the first quarter.
So our earlier than expected demand in our wholesale segment and we were able to support that earlier demand with the best on time deliveries from Asia, we've seen since the pandemic began.
Our retail and international sales in the first quarter were in line with our expectations.
Inventories are now lower than last year, which drove a significant increase in cash flow in the quarter.
Thankfully the impact of historic inflation is moderating.
<unk> costs in Ocean freight rates are trending lower we expect to see the benefit of those lower costs. Beginning later this year and the full benefit next year.
SG&A in the first quarter was lower and better than planned.
We've reduced discretionary spending and staffing levels to mitigate the slowdown in consumer demand that began last year.
Birth trends in the United States are stable and the outlook for births is improving our baby apparel continued to be our best performing product offering and contributed over 60% of our first quarter apparel sales.
Given the better than expected performance in the first quarter and our latest forecasts, we are reaffirming our outlook for sales and earnings this year.
Our retail segment was the largest contributor to our sales in the first quarter comparable sales were down 13% and in line with our expectations. Our store sales were better than expected. Our E. Commerce sales were a few points lower than planned and in line with market trends.
Our baby apparel outperformed our spring sleepwear and playwear product offerings spring selling has been slow to turn on we believe in part due to cooler weather.
An earlier Easter usually bodes well for first quarter sales, if the holiday coincides with spring like weather.
Didn't see that combined benefit of an early Easter and warmer weather this year.
Our best performance in retail sales was in Florida, and the mid Atlantic region.
We saw lower than average comps in new England, and our Great Lakes region.
Our best performing stores were in indoor malls, we saw weaker comps in open air outlet centers.
In terms of trends, we achieved positive comps in January trends slowed in February and then trended lower in March and April year to date comparable retail sales are down about 15%.
In the weeks ahead, we expect warmer weather will arrive in more parts of the country. The turn to warmer weather has historically provided a good stimulus to our sales.
In the first quarter, we achieved a mid single digit price increase in our retail segment, which fully offset product cost increases.
Continue to be a very promotional environment as some of our competitors were working down excess inventories and trying to jumpstart spring selling.
We believe we were leaner on prior season inventories than some of our specialty competitors and therefore less promotional in the first quarter that said our market analysis suggests we were competitive on in season products.
We continue to test lower prices on some key product offerings in the first quarter. There was lower prices did not drive the desired results in those tests most consumers bought the same number of units at lower prices.
Our improvement in price realization over the past few years has largely been driven by better inventory management.
Since the pandemic began we've reduced low margin product choices, we increase the mix of longer lifecycle products, which are less likely to be marked down and we bought fewer units to improve sell throughs and to reduce the mix of low margin clearance sales.
And our store visits our store associates tell us they see no meaningful resistance to price increases we believe we offer a superior experience and value in young children's apparel. We have good sales offered every day of the year.
Given our progress with SKU rationalization inventory management and price realization in recent years, our store unit economics have improved and more attractive store opening opportunities are available to us.
Nearly 70% of children's apparel is purchased in stores.
Believe our stores provide the very best presentation of our brands and our highest source of new customer acquisition.
And when we open stores, we also see a lift in our high margin ecommerce sales.
We plan to open over 50 stores in the United States. This year and plan to close about 10 stores upon lease exploration or.
Our store openings are focused on high traffic centers that provide convenience for online shoppers and enable the same day pickup of digital purchases.
Consumers, who shop online and in our stores, our highest value customers. They shop more frequently with us and spend three times more each year than our single channel customers.
Carter's has the largest specialty retailer focused on young children's apparel in the United States with nearly 800 beautiful stores from Maine to Hawaii, We plan to have 1000 or more stores in the United States by 2027. We also have the highest rated online platform for young children's apparel.
For the year, we are forecasting our retail sales down about 7%, that's a point lower than our previous guidance to reflect a slower start to spring sales.
Collectively our new stores are expected to contribute about $40 million in sales this year.
Our ecommerce penetration is forecasted to be 34% of our total retail sales this year compared to 37% last year.
We believe the lower mix of ecommerce sales reflects consumers shifting back to store visits in the post pandemic period.
We view the consumers shifting back to stores positively given the high fixed cost structure of that channel.
Our wholesale segment was the second largest contributor to our first quarter sales our wholesale sales were better than planned due to more favorable replenishment trends.
And earlier demand for our exclusive brands.
As planned our wholesale sales in the quarter were lower than last year, a decrease in first quarter wholesale sales reflects a nearly 30% decrease in sales to off price retailers.
Lower sales to department stores, the suspension of sales to buy buy baby and to a lesser extent lower sales to club retailers.
With leaner inventories, we have less need to sell our brands through low margin off price retailers. This year.
We continue to believe our business trends will improve as we move through the balance of this year. This time last year, our wholesale customers were moving orders up.
Like Carter's they expected another good year of growth in the post pandemic period.
By ordering several weeks early last year, our wholesale customers wanted to reduce the risk of port congestion and related delays getting our new product to the floor.
But by late spring it became clear that historic inflation was weighing on consumer demand.
In the second quarter last year, our largest wholesale customers began to reset expectations for growth given the significant and unexpected slowdown in consumer demand.
In the first half last year, our wholesale customers were building inventories in the second half last year, there were aggressively reducing inventory commitments.
Inventory corrections included the suspension of automatic replenishment systems in the second half last year.
Collectively our wholesale customers efforts to correct inventory levels were successful.
They entered this year leaner and cleaner with our brands with less prior season carryover products.
In recent meetings with our largest wholesale customers. There is a consistent theme expressed in their outlook for this year. It is one of caution and conservatism and forecasting consumer demand with the expected continuation of interest rate hikes and possibility of a recession, we believe it's prudent to be concern.
And forecasting sales this year.
Given our.
Lanning cycle, our wholesale customers have now fully booked our seasonal product offerings through winter 2023.
Seasonal demand represents about two thirds of our annual wholesale forecast the.
The balance is driven by automatic replenishment of essential core products for baby apparel. Those products include consumer staples, such as Bodysuits wash cloths towels, bibs blankets and one piece dressing we call sleep and play.
Given the multiple outfit changes in growth in the early months of a child's life. The demand for these products drives traffic and frequent purchases last year, we sold nearly 25 body suits for every child born in the United States.
Automatic replenishment systems ensure these items stay in stock, it's the equivalent of bread milk and eggs at the grocery store.
With leaner inventories our wholesale customers replenishment systems have now been fully reactivated replenishment trends exceeded our first quarter plan and continue to trend higher than last year through April .
Replenishment demand is expected to be better in the second half this year as we comp up against the Destocking efforts by our wholesale customers in the second half last year.
We are the largest supplier of young children's apparel to the largest retailers in North America No. Other company in young children's apparel has the depth or success of relationships Carter's has developed with the winning retailers.
Every major retailer has a private label brand, which complements our brands our Carter's brand has 80% more share than the largest private label brand.
One of our best performing exclusive brands sit side by side with the markets best performing private label brand.
On average our brands are priced a dollar or two above private label brands.
In inflationary markets, we're mindful of the risk of consumers trading down to lower price brands.
Believe private labels performance in recent years is less about trading down and driven more by where consumers are shopping they're consolidating trips given higher gas prices and seeking the convenience of one stop shopping for groceries and other essential products.
In recent years Carter's has benefited from increased traffic to target Walmart and Amazon are strong brand presence with each of those winning retailers is a competitive advantage no. Other company in children's apparel has our broad market presence.
For the year, we're forecasting wholesale sales down about 9% over 50% of that decrease reflects the suspension of shipments to buy buy baby and lower sales to off price retailers. The balance of the decrease reflects lower sales to department stores and other retailers.
Our exclusive brands are expected to contribute over 52% of our wholesale sales this year up from less than 50%.
Last year.
Going forward, we expect that more of our wholesale sales will be driven by fewer larger and more successful retailers of young children's apparel.
Our international sales were a bit better than planned in the first quarter, our sales in Canada, Mexico, and Brazil contributed over 80% of our international sales in the quarter.
As expected our sales in Canada were lower in the first quarter like the United States, we've seen consumer demand slow in Canada as inflation ramped up last year.
Over 80% of our sales in Canada in the quarter were direct to consumer we saw a mid single digit decrease in comparable sales in Canada in the first quarter with weather turning warmer in Canada in recent weeks comparable sales have turned positive second quarter to date.
We saw double digit sales growth in Mexico in the first quarter, Mexico was replicating the success, we've experienced in Canada, and the United States with our co branded stores.
Since acquiring our licensee in Mexico in 2017, we have opened 25 highly productive co branded stores. We currently have over 50 stores in Mexico, and envision 100 or more stores in that market in the years ahead.
Our wholesale partner in Brazil, Reish Wella has opened over 50 Carter's stores in recent years, expanding the distribution of our Carter's brand beyond their 260 Department store locations.
Our international expansion efforts are focused on Latin America, the middle East and Europe through wholesale relationships, including Amazon International.
For the year, we are forecasting international sales to be comparable to last year, we're assuming growth in Mexico, and Brazil, which is expected to offset lower sales in Canada and other markets.
Our brands are supported by nearly 40 wholesale relationships with retailers, representing our brands in over 90 countries and about 100 online platform platforms outside of North America.
A bright spot in the first quarter with our supply chain performance collectively the improved trend in on time receipts from Asia, the speed of moving our products through the U S ports and a favorable trend in product in ocean freight rates may be a bellwether of a return to better market conditions in the <unk>.
Years ahead.
We began to see the benefit of on time shipping performance in the fourth quarter last year with earlier than planned wholesale demand for our new spring product offerings.
Given leaner inventories heading into this year, we saw earlier than planned wholesale demand for each of our brands in the first quarter, which was supported by excellent execution by our supply chain team.
Historic inflation and ocean freight rates negatively impacted our earnings last year by over $50 million.
We are in the final stages of negotiating new ocean freight rates at favorable pre pandemic levels.
The new rates will go into effect beginning in the second half this year.
We are expecting a meaningful increase in cash flow. This year driven by a reduction in inventories we began the year with nearly $100 million of inventories packed and held following the slowdown in consumer demand and inventory corrections last year.
By the end of this year, we expect that inventory will be fully sold through our wholesale customers and direct to consumers at desired margins.
We have confirmed orders for the pack and hold inventories from our wholesale customers. None of the inventory is expected to be sold to the off price channel.
In summary, 2023 is off to a better start than planned we expect our sales and earnings trends to improve as we move through the balance of the year year over year comparisons become less challenging in the second half of.
A year ago. The lives of families with young children were disrupted by historic inflation and other global events that said, we believe consumers are resilient and adjusting to the higher cost of living.
We believe aggressive actions by the federal reserve have slowed consumer demand and lowered inflation with time, we expect inflation will moderate to desired levels consumer confidence will recover at market conditions will improve until then we plan to strengthen our product offerings.
Forecast demand conservatively stay lean on inventory commitments and reduce discretionary spending we plan to focus on margin preservation and cash flow fully invest in our growth strategies and be well positioned to benefit from the market recovery in the years ahead.
In the context of Carter's 158 year history inflationary in recessionary cycles are relatively short lived.
Down cycles in retail come and go.
Thankfully one constant we've experienced for generations is that beautiful babies are born every day and the number one brand their families choose more so than any other apparel brand for their child is Carter's.
I want to thank all of our employees for a stronger than planned start to the new year and for their commitment to strengthen our performance in the balance of the year.
At this time, Richard will walk us through the presentation on our website.
Thank you Mike Good morning, everyone beginning on page two of our presentation materials. We've included our GAAP P&L for the first quarter.
Page three highlights a net adjustment to our GAAP results in the first quarter related to organizational restructuring.
This information is included for your reference this morning, I will speak to our results on an adjusted basis, which excludes this $1 million net charge.
On page four we have some of our metrics for our performance in the first quarter net.
Net sales were $696 million, a decline of 11% versus last year.
Sales exceeded our previous guidance due to stronger than planned demand in our U S. Wholesale business first quarter sales in our U S retail and international segments were largely on plan.
We believe demand throughout the marketplace remains muted as inflation high interest rates, increasing consumer debt loads and overall weak consumer confidence continued to weigh on consumer spending.
The decline in profitability versus last year tracks to the decrease in sales with adjusted operating income of $58 million in the first quarter and adjusted EPS of <unk> 98 cents.
Operating income and adjusted EPS were better than we had planned for the first quarter or the first quarter. The results of the earlier than planned sales in our U S wholesale segment.
Page five recaps, our first quarter performance relative to our previous guidance.
Sales were a little more than $40 million above the high end of our guidance range.
Retail comps were down 13% right in the middle of the range, we had forecasted.
At wholesale sales declined 9%, which was far less than we had planned given the shift of demand into Q1 from Q2.
And international sales were on plan.
Our upside in sales was driven by earlier than planned demand in our U S. Wholesale segment, specifically for our exclusive brands product.
Our supply chain has done excellent work and putting us in position to support demand from our wholesale customers. Our on time delivery and wholesale was 97% in the first quarter compared to about 60% last year when product was delayed because of significant congestion at the ports.
We saw higher than planned demand for both seasonal and replenishment product in wholesale.
Estimated that approximately $35 million up first quarter sales represented demand, which had been planned for the second quarter.
As such these higher sales are largely timing related and right now we're not considering them as upside to our full year outlook.
Our profitability was also above the high end of our guidance driven by the outperformance in wholesale sales in the quarter.
Moving to page six we have our P&L for the first quarter on.
On net sales of $696 million, we had a gross margin rate of 44, 5%, which was a decline of 90 basis points from last year.
We had previously forecasted some expansion in gross margin in the first quarter relative to this previous forecast we had substantially more wholesale sales in the quarter. Then plan a result of the timing shift I've mentioned. Additionally.
Additionally, much of the higher demand was driven by our exclusive brand customers.
It's wholesale and exclusive brand sales carry a lower gross margin rates than other parts of our business, but a very profitable and margin accretive on an operating income basis.
Year over year gross margin benefited from spending less on airfreight than in the first quarter of 2022.
This benefit that was offset by continued higher ocean container rates, some higher costs related to excess inventory and the mix impact of higher wholesale and exclusive brand sales.
We're encouraged by what we're seeing in the market regarding ocean freight rates after a period of significant inflation across the industry. We expect meaningful relief in these costs beginning later this year.
Our U S retail business had continued success in improving realized pricing in the first quarter and improvement in the mid single digit range, although a bit less than we had planned as Q1 sales of new spring product at higher margins were lower than anticipated.
Spending was well controlled in the quarter down modestly compared to last year.
<unk> spending such as for distribution outbound freight and fulfillment was lower corresponding to the lower level of top line sales as well as spending on marketing and performance based compensation.
We saw some higher costs in the quarter related to bad debt technology spending and higher store costs in Mexico as we've continued to grow our store base in that market.
Adjusted operating income in the quarter was $58 million, representing an adjusted operating margin of eight 3%, which was better than we had planned.
First quarter operating income last year was $103 million at 13, 1% operating margin.
Below the line interest and other expenses were $5 million lower than 2022, principally due to the retirement of $500 million of pandemic related senior notes in the second quarter of last year.
Our effective tax rate was 24, 5% in the quarter compared to 23, 1% in the prior year.
We planned for a higher effective tax rate in 2023, as we expect more of our earnings to be generated in the U S and to have greater non deductible compensation costs.
Our weighted average share count was lower by about 3 million shares versus last year, driven by the significant amount of share repurchases, we completed last year.
On the bottom line adjusted diluted earnings per share were <unk> 98, compared to $1 66 in the prior year.
Yeah.
On page seven we summarize some highlights of our balance sheet and cash flow.
Our balance sheet isn't very good shape total liquidity was over $900 million a combination of a good level of cash on hand, and significant capacity available under our revolving credit facility.
Q1, ending inventory was $614 million down about 10% year over year.
Our inventory position at the end of the first quarter is lower than we had planned which is a result of the acceleration of wholesale demand into the first quarter.
Our pack and hold inventory at the end of the first quarter stood at approximately $91 million compared to approximately $100 million at the end of last year, we're expecting to sell through the vast majority of this pack and hold inventory at good margins by the end of this year.
Excluding pack and hold first quarter inventory was down 19% versus last year.
We're projecting inventory will be down year over year in each of the remaining quarters of 2023.
Total debt was down substantially versus a year ago, reflecting our repayment of the pandemic related financing in second quarter last year our.
Our leverage is low approximately two eight times on a lease adjusted basis, we believe our balance sheet cash flow and leverage profiles afford us significant flexibility for growth and to manage through the current market environment.
And subsequent to the end of the first quarter, we have further reduced the amount outstanding on our credit facility by another $60 million.
We generated positive operating and free cash flow in the first quarter with both metrics up substantially over the prior year as a result of the factors listed here on page seven.
We're continuing to forecast strong operating cash flow in 2023 of over $300 million driven in part by lower inventory levels.
Turning to page nine and a summary of our performance of our business segments in the first quarter.
As I previously mentioned, our first quarter consolidated adjusted operating margin was eight 3% compared to just over 13% last year.
This decline was largely a function of fixed cost deleverage.
Given the seasonality in our business the contribution of revenue is more heavily weighted to the second half of the year.
Expense deleverage was more pronounced in our U S retail and international businesses, which experienced more meaningful year over year sales declines relative to U S wholesale.
Given the expected improvement in business trends in the second half of this year I'll note that we're planning for double digit margins in each of our business segments on a full year basis.
On page 10, we summarize some of the performance drivers for each of our business segments in the first quarter.
U S retail sales declined to 12% as inflation continued to adversely affect consumer demand.
Comparable sales declined 13% within that down 10% to 15% range, we guided to on our last call.
As I said, we believe the persistent cooler weather has hampered demand for spring and warmer weather product.
Despite the macroeconomic challenges our average unit retail pricing improved in the mid single digits in the quarter, reflecting our ongoing focus on inventory productivity and improved pricing capabilities.
While overall traffic was lower in both of our retail channels traffic to our stores was meaningfully better than we had planned.
U S retail adjusted operating margin was eight 1% compared to 13, 6% last year.
Better price realization was offset by expenses expense deleverage higher product and transportation costs and higher inventory related charges.
And our U S wholesale business net sales declined 9% compared to last year.
As I noted earlier sales exceeded our plan due to the earlier than planned demand.
Versus last year are lower Q1 wholesale sales reflected the conservative stance. Most every one of our wholesale customers has taken with regard to inventory commitments for 2023.
Our sales decline also reflects the absence of sales to buy buy baby.
Regarding buy buy baby, we have now incremental financial exposure given the recent bankruptcy filing of its corporate parent bed Bath and beyond we are fully reserved for the modest receivable, we have outstanding and have begun reallocating inventory to other customers.
U S. Wholesale segment operating margin was 18, 4% compared to 19, 7% last year better price realization and lower airfreight costs were more than offset by higher product and transportation costs and increased bad debt expense.
In our international business sales declined in the quarter by 14% and were down 12% on a constant currency basis. This decline reflects lower demand in Canada and with wholesale customers outside of North America.
Sales in Mexico grew in the mid teens, driven by our expanding store footprint in this market.
International adjusted segment margin was three 3% compared to nine 7% last year.
Expense deleverage and higher product and transportation costs drove the decline in operating margin in the quarter.
Next couple of pages in our presentation summarize some of the unique strengths of our company.
On page 11.
Carter's is the best selling brand in young children's apparel, we felt a very large business. We hold the number one market share in young children's apparel here in the U S and in Canada, and we're building a sizable share in Mexico.
Tens of millions of consumers shop, with us and our direct to consumer businesses and millions more with our wholesale customers.
Generations of consumers have come to love, the Carter's and Oshkosh brands for their strong value propositions with value, meaning not only compelling price points, but also quality durability and styling.
Increasingly we are telling the story of our brands across our various marketing channels, including a very active presence in engagement on social media.
On page 12, NPD recently published some very interesting data for the baby segment of the market. That's information makes it clear the depth and reach of Carters with the various segments of the population, which are purchasing baby apparel <unk>.
Z millennials and Gen X.
Carter's hold the leading market share in each of these generational groups market share positions, which are generally at multiples of the next closest brand.
Turning to page 13.
We're fortunate to have built a very large and profitable e-commerce business at Carter's our website offers consumers the broadest assortment of our products and we're continually looking for ways to enhance the online shopping experience.
An area of investment over the past several years has been our mobile app.
Increasingly consumers shop on their mobile devices as opposed to laptops and desktop computers and just a couple of years sales on our app have grown to represent about a quarter of all U S. E Commerce sales and our data shows that it's our very best and most loyal customers who are using the app.
We continue to enhance and invest in our App with current efforts focused on building more sophisticated personalization capabilities and currently we're testing same day delivery with shipped a first of its type collaboration in young children's apparel.
On page 14, we've spoken on recent calls about our little planet brand, which is focused on sustainability and organic materials.
We consider ourselves brand builders here at Carter's and while new children's apparel brands come and go in our market few other companies have our ability to develop innovative and beautiful product and achieve the broad market distribution, which characterizes our business with a meaningful presence in the wholesale retail store and ecommerce channels.
Based on strong consumer reaction to little planet 2023 will be a year of meaningful growth for this brand. This.
This year, we will roughly double the number of our Carter stores, which carry the brand. Additionally, we will triple the number of wholesale doors, where consumers can find little planet.
Our wholesale partners for little planet include target Kohl's Fabulist and Macy's.
We've also continued our product innovation and little planet recently, launching select women styles focused on mommy dressing and maternity.
On the next page as warmer weather finally starts to arrive across the country families are looking forward to summer holiday celebrations.
<unk> has always led the market in providing great holiday outfitting and we have some great red White and blue product to make this year's fourth of July celebrations, even more special.
Yeah.
Now turning to page 16.
<unk> exclusive brand for target just one you recently launched its latest spring styles across baby and toddler program and these products are featured prominently across targets website, and social media and in store marketing.
Just when you continues to perform very well at target, particularly baby.
Target carries a very broad assortment of just one year products, including some great playwear, and sleepwear, which complement the strong baby assortments.
Moving to page 17, Carter's exclusive brand for Walmart child of mine has also continued to deliver strong performance at this important consumer shopping destination.
Earlier this year, we launched a new child of mine Baby collection, featuring new and elevated fashion building on the success of last year's relaunch of in store and online branding. We're expecting good continued sales momentum and growth for child of mine.
On page 18, simple joys, our Carter's exclusive brand for Amazon will offer a new and upgraded digital experience for Amazon shoppers. This spring.
Simple joys brand store photography, and digital content have been updated and improved to highlight the best of this spring season styles and year round best sellers.
<unk> for simple joys on Amazon continues to be strong and we're forecasting good growth in the coming years and Thats important part of our business.
Additionally, our relationship with Amazon has provided opportunities to grow simple joys outside of the United States with Amazon's extensive global reach.
On page 19, we have a photo of a new Carter's store, which recently opened in Alpharetta, Georgia.
Said in his remarks, we're excited about the prospect of returning to store growth here in the U S.
This page summarizes some of the reasons, we feel so strongly about the merits of expanding our store presence, we have a well developed and thoughtful process for evaluating new store opportunities. We're rigorous in applying this process and sometimes say no to opportunities which are presented to us.
We rigorously measure the performance of our stores these investments lend themselves to observable and measurable metrics, which we track closely.
We view our stores is a distinct competitive advantage, we believe they offer the best assortment and experience for consumers shopping for young children's apparel.
Going forward, we expect to continue to test new store formats and experiences as we grow this part of our business.
On page 20, our partner in Brazil, <unk> continues to grow the presence of the Carter's brand in this important market.
We as well are now operates about 50 freestanding Carter's stores in Brazil, and approximately 260 shop in shop locations within its department stores.
In Mexico, which has a similarly sized children's market to Brazil, we continue to see very good growth. We recently opened our 20 <unk> larger format co branded retail store, bringing our total number of stores to nearly 50 locations.
As Mike mentioned, we see an opportunity to eventually have at least 100 stores in Mexico. In addition to continuing to develop the e-commerce and wholesale channels in this market.
Moving to our outlook for 2023, beginning on page 22.
Given the challenging macro environment, we are focused on the areas, where we have the most control, namely productivity earnings and cash flow.
As we look to the balance of the year. We believe there are multiple factors that will continue to better performance.
Performance in the second half relative to the first half we've summarized some of the more significant ones here on page 22 and.
An important overall assumption is that inflation and its impact on consumer demand will moderate as we move through the year.
In the second half our businesses will have a better mix of inventory than a year ago. The issues with port congestion are behind us and we are receiving product on time.
Overall, we expect to be leaner on inventory through the balance of the year store level inventories are projected lower by more than 30%.
This leaner inventory position is expected to yield muscle benefits better sell throughs less clearance and promotional activity and improved price realization.
In our retail business, we expect to see a greater contribution from new stores in the second half.
Our prior year comp sales comparisons also become less challenging in the second half.
In wholesale we will anniversary the significant destocking actions many of our wholesale customers took in the second half of last year actions, which included canceling orders at a historically high level and in some cases suspending automatic replenishment programs.
And in international we have good growth planned in each component of the business with the largest contribution coming from continued momentum in our direct to consumer operations in Canada and Mexico.
Second half earnings are expected to benefit from the improved trend in sales across the business, which I just described and we're finding meaningful gross margin expansion in the second half in part due to lower product and freight costs.
We intend to continue to control spending tightly and EPS is expected to benefit from a lower average share count.
For the full year on page 23.
The majority of our business is ahead of us over the balance of the year and today, we are reaffirming our outlook for 2023.
We are forecasting sales of approximately $3 billion, we're targeting adjusted operating income of approximately $350 million and adjusted EPS of $6 15.
And as mentioned earlier, we are expecting solid operating cash flow this year.
For the second quarter on page 24.
We're planning for net sales in the range of $590 to $605 million or a decline in the mid teens versus last year, but for the earlier demand in wholesale which benefited the first quarter. We would've planned Q2 net sales down about 10%.
Our overall outlook for the first half is consistent with our initial expectations coming into the year, if not a bit better.
Our Q2 outlook reflects a U S retail comp decline in the mid teens and U S. Wholesale sales down in the range of 20% to 25% again second quarter wholesale sales will be affected by the earlier demand. We saw in the first quarter, we're projecting a first half decline in wholesale sales in the mid teens.
And second quarter International segment sales are planned down in the mid single digits.
On profitability, we're expecting operating income in the range of $30 million to $35 million and adjusted EPS between <unk> 40 and 50.
With these comments, we're ready to take your questions.
Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.
Our first question comes from Warren Cheng with Evercore ISI. Your line is open.
Hey, good morning, I had a question on the second half gross margin, so I'm getting to a pretty significant implied second half gross margin expansion just given the guidance you've given around EBIT in SG&A in the ballpark of 300 basis points can you just give a little more detail on the assumptions you have embedded there and which components really accelerate from.
The first half second half.
Sure.
I would agree with you. It is a significant expansion in gross margin rate that we have planned it's definitely one hundreds of basis points that we're that we're targeting and I think the good thing is we have good line of sight to the components of that over half of it is going to be driven by lower inbound freight costs to Mike's earlier point, we saw significant deterioration in earnings last year because of what happened.
With global freight rates were.
We're expecting substantial relief there so that will start to benefit.
The gross margin rate, we did have a mix benefit because we will have a greater contribution from our U S retail business as opposed to wholesale and retail businesses are that gross margin rich part of the business.
We will have less costs related to inventory will have a better mix of inventory. We are anticipating at this point less clearance activity less promotional activity all of that will yield higher realized pricing.
In addition to freight costs being down we are expecting product costs themselves are down in the second half that those would be the principal building blocks, but.
We're bullish on the outlook for our gross margin rate in the second half.
Thanks, that's really helpful color and then I just had a broader question on market growth.
Just look at all of the publicly available data on baby and young children spend it's still indicates we're pretty depressed versus pre pandemic levels and I was just curious.
Your thoughts on overall market spend you've talked about inflation in some other.
Things, having an impact here, but are we still depressed or are there reasons, where 2023 is sort of the new.
Correct, new lower baseline that we should think about I would actually describe the market as fairly stable in the birth rate thankfully is fairly fairly stable and we've seen some recent analysis to say that.
The percentage of women, saying that they're expecting a child in the next six months is increasing so we're we're forecasting the.
The baby apparel market to be stable going forward stable if not improving.
Thanks. Good luck. Thanks, Thanks work.
One moment for our next question.
Okay.
Our next question comes from Jim Chartier with modest Crespi Hardt. Your line is open.
Good morning, Thanks for taking my question.
So how much of the $50 billion.
Potential ocean freight savings are you expecting to realize this year and when will that start to flow through the income statement.
It's about a $30 million benefit in the second half Jim just from rate favorability that we're anticipating there is a bit more in terms of total inbound freight costs coming down just because the unit volume is declining and we wont get the entire benefit of those improved rates. This year. Some portion gets capitalized into inventory, but on the order of about $30 million rate favorability in the second half as our.
<unk>.
Okay and then.
It sounds like Ocean freight was up in first quarter can you give us some sense of how much that impacted the first quarter and is it going to be pumpkin second quarter as well.
It is expected to be up in the second quarter, we're continuing to operate under our.
Legacy freight contracts until we get to more of the middle year. It was it was up in.
In the first in the first quarter I don't recall exactly how much but it was not as injury is certainly is the 50.
<unk> 50 million that we saw last year.
<unk> of that.
And then how does the size of the.
Kids market in Mexico, compared to Canada and is there anything structurally that prevent you from ultimately getting to a similar market penetration in Mexico as you would have in Canada.
Marketing, Karen it's closer to $2 billion in the markets in Brazil, and Mexico are closer to $3 billion.
And.
In Mexico, I would just say we're earlier in the stage of development. There. It's only in recent years that we've started to rollout the cobranded stores, Canada with a licensee of ours years ago. They actually develop the co branded store and then we were so impressed by the good work. They did in Canada, we replicated that model here in the United States with <unk>.
So I would say Mexico was an earlier in its earlier stages of development.
The market is much larger.
Right.
I would also say the ecommerce market is less developed in Mexico, and Thats what were encouraged by.
You have to assume over the next 10 years, the ecommerce market will be more fully developed in Mexico than it is today in the United States and Canada.
Right.
And then in terms of.
You reduce your retail sales outlook by.
1% for the year is that entirely reflected in your outlook.
Outlook or did you reduce your second half.
Largely largely in the second quarter.
Okay. Thank you.
Youre welcome.
And remember for our next question.
Our next question comes from Jay sole with UBS. Your line is open.
Great. Thank you so much Mike can you just talk about within the retail business.
Traffic trends.
Both in stores and online and maybe just talk about a little bit of a conversion trends that youre seeing in stores. Thank you I would say the traffic has been down and I would say the units being purchased per transaction is down the consumers pulled back what we find interesting is we're studying kind of the traffic trends and the year over year behaviors, we find.
More consistency and consumer behavior versus 21 than 2022. So if you recall in 2021, you had the benefit of stimulus you had the benefit of people, having access to vaccines reconnecting with family and friends again in 2021 was kind of a we often look for what is the base year was at 2019.
Was it 2021, we see more consistent season consumer behavior versus 2021 call that a period of optimism in the post pandemic period I would suffice it to say 2023 is not a period of optimism. So consumer confidence is much different today than it was in 2021, but relative to 2021.
Our comps are trending down in the high teens and we're assuming that that trend will continue. So if you were to look at our comp trends 2023 versus 2022. It would suggest a meaningful improvement in trend is going into the balance of the year, but relative to 2021. The trends are largely consistent so that's we've been <unk>.
Being that for several months now and it's logical to us the consumer was in a much different place in 2021 than they were even in 2022, a year ago around around this time, Jay the consumers were shocked by doubling of gas prices in <unk>.
Grocery prices going up.
It didn't have access to baby Formula and then inflation peaked at 9% so.
What we find interesting.
A year later I actually think the consumer's in a better place I wouldn't say the arrow's pointing way up but the consumer is recovering from from that historic shock.
Their lives a year ago.
So.
We feel as though we have a handle on what the trends will be in the balance of the year, but our experience to date. This year the consumers pulled back the federal reserve's objectives of slowing the economy by raising those rates slowing the consumer down as clear is clearly working because the economy, even with the news yesterday the growth in <unk>.
Tommy is lower than it had been so it's working.
And.
Recall, chairman Powell, saying theres going to be some pain near term I think the consumers are feeling that pain right now with the higher prices and Jay I would just add the traffic trends are more challenging online in aaron's stores, the consumers seem to be rotating more into stores. This year, you can see that on some of the market data and we look out.
How our customers are doing as well and so.
The traffic trends while down are.
Our.
More concerning I would say online, but it's really the it's really the rotation into stores. The stores are much farther than that line.
Got it thank you so much.
Youre welcome.
One moment for our next question.
Our next question comes from Tom Nick <unk> Wedbush Your line is open.
Hey, good morning, guys. Thanks for taking my question.
Just wanted to ask about the retail comps.
Obviously, you're still pretty negative, but now we're kind of comping negative comps.
<unk> comps.
I realize that.
Hey, Shannon it's Ben.
A headwind is that weather hasn't exactly been favorable but.
Do you think that there is something.
From a competitive standpoint, that's happening.
A lot of your.
Competitors.
Not bad.
Oh.
Proactive and prudent inventory management as you have debt, which has resulted in a lot of them.
Discounting and promotional activity.
<unk> you.
We think that thats weighing on you as well that we set a goal.
Our race to the bottom on pricing among your competitors in that.
May be siphoning.
Traffic away from your DTC channel towards.
Those discounts are your competitors.
I think thats it.
Possible I would say the better retailers and I think there are more better retailers and bad retailers, the better retailers, including our wholesale customers again, the beauty of our business. We are talking to them. All the time. So we've had a number of top to top meetings since we.
Last updated you in February .
Our whole focus is run leaner on inventories drive better sell throughs, even even those who are known for the lowest prices in the market are focused on running leaner.
Inventories have more clarity in the product offering.
Having better sell throughs better margin realization better price realization, having less on the clearance rack at the end of the season. There are exceptions. There are retailers that as you go in their stores. They are loaded with product because whatever they bought people weren't buying but those aren't the people we want to compete with we want to compete with the better retailers that.
Better retailers, including Carters are running leaner on inventory seeing better price realization.
And.
So is there a bit of that but there's always been promotional retailers were on promotion. We have good sales going on everyday so we're competitive we look at our competitive.
Our pricing relative to our competition and it is true we have less clearance inventory than we did a year ago less clearance inventory, perhaps than some underperforming retailers, but we feel good about.
Our strategy run leaner on inventory better sell throughs, better better margins better price realization, that's that'll be our plan going forward.
Okay. Thanks very much.
Thanks very much.
One moment for our next question.
Our next question comes from Ike <unk> with Wells Fargo. Your line is open.
Hey, guys two questions for our retail and wholesale just on the retail side, Mike Your comments on the year to date down 15. So is that implying that April has been running down close to 20, and I guess, where I'm going with that is your comps in the first quarter were in line with plan, but youre lowering your retail outlook.
For the year by a couple of points and so like what's informing that decision based on what you've seen in April and the behavior, maybe E series, such an important part of the business for you, but can you just elaborate a little bit more there you're exactly right. So it's so we're probably running down high teens in April April small potatoes, thats one of the smaller months of the year. So it's just it's been a.
Slower start to spring selling Easter wasn't what we expected. It today again, we have insight into how other <unk>.
Retailers are doing with Easter Easter is been spring has been slow to turn on and so we're simply reflecting that in our revised outlook for the year and I think I think we're we've lowered it by about a point of our performance for the year.
Fairly small adjustment for the year.
Got it and then maybe micro Richard.
On the on the wholesale you talked about the seasonal product offerings fully booked two thirds of the business and then you have the auto replenishment business for the rest.
Is there any way you could kind of help us understand what's embedded in those plans year over year, the seasonal offering thats booked what does that look like year over year, and then I guess more importantly, what I'm trying to understand is on the auto on a replenishment slide.
It is embedded in that wholesale outlook for the year.
Year over year on the replenishment side I'm trying to understand kind of year over year with what the business looks like if you break those two buckets up if that's possible.
Yes, as I tried to try to share that with you. So for the year were planning to do.
Three down high single digits, obviously first first half down mid teens second half better down mid single digits, we're going to have a better replenishment business, we have less cancellations in the back half.
And Youre right replenishment is a little over a third of our sales so in the second half.
Obviously, the seasonal bookings are down at a higher rate than we're planning replenishment second half, we're actually planning replenishment up first half I think replenishment down somewhat in the second half we're planning it up high single digits.
Obviously buy buy baby is out of business.
You take it out of the mix, we'd probably be up low double digits.
And we've mentioned before that some of the folks last year when inventory became a challenge had turned replenishment off so we're optimistic that we're going to have good trends in the second half folks did book conservative around the seasonal businesses. That's why we're we're calling the year down high single digits, but if those orders hold which they have so far in fact, we've had many accounts call product out.
That's why we exceeded our plans in Q1, so if those seasonal orders hold which we expect that they would at this point and selling is good.
We will look at our replenishment businesses has a potential to continue to do well.
And if good things happen, we've got even spring 'twenty four pre ships that there's opportunities maybe to pull those in this year. So the trends overall are good we were asked about sell through obviously, there's two different stories, that's exclusive brands that sell through is very good at it.
Good first quarter, where they pulled orders in early and they sold well the business that Carter's branded business with the department stores is a little bit more challenging more in line with some of the things we've had in our direct business.
Gross profit margins replenishment by its nature has higher margin, it's higher margin for the retailer it's higher margin for us. So we will see a higher mix of replenishment sales in the second half this year relative to last year and Thats, our baby business, which has been our strongest business a share over 60% of our sales are in that core baby business, which is high margin and very <unk>.
Good sell throughs year to date.
Thank you.
One moment for our next question.
Our next question comes from Paul addressed with Citi. Your line is open.
Hey, Thanks, guys, Hey on the comment about sell through is can you maybe talk about what youre seeing at point of sale.
Within your wholesale channel and maybe specifically.
Your exclusive partners and and then I'm also curious about the gross margin in the quarter, how does gross margin look.
Channel versus itself.
Versus how much of the decline was mix shift.
Yes, I'll take the first one Paul on that.
Selling.
We had very good first quarter and year to date with exclusive brands.
The selling of our products in all three of our exclusive brands are up double digit year to date and again a lot of good things happen our supply chain performed an exemplary level.
We had good business planned as theyre selling accelerated they pulled Q2 orders into Q1, we had the product care early and they were able to capitalize on that with the consumer so selling is excellent exclusive brands and it is more challenging in the Carter's brand at some of the department store accounts likely due to traffic and weather has been a challenge around the country to spring as well so it's kind of two different stories.
Paul I would say on margin as I mentioned, we were planning for margin expansion in the first quarter I would say it was the mix shift to wholesale that predominantly made that not the case. The fact that we had declines then but within the individual businesses, perhaps retail most specifically I would say they were slightly below their margin plan in the quarter.
I would attribute that to just not having as much of the margin rich spring sales as we had forecasted I think the consumer is gravitating a bit more towards clearance. We don't have a lot of clearance product that we did see a little bit more of that activity in the quarter than we had planned and it's just spring has been slower to turn on and that will be really margin rich.
Business for us when when the weather warms up and what was it within clearance was largely cooler weather gear. So.
The consumer was opting for more cooler weather gear in the first quarter.
Got it got it.
The wholesale.
<unk> being up double digits versus what youre seeing in your own.
DTC direct retail channel.
Is that im form.
Do you think about the price versus gross margin equation are you starting to see consumers really gravitate towards the lower price product out there in the market.
You can share to just help.
Many around wholesale partners, how does that how does that inform how you think about your own pricing architecture within the retail channel Paul what we've seen over the years for 20 years with as long as we stay within a buck or two of private label, we do well as I shared with you our best performing brand exclusive brand set side by side with the best performing <unk>.
Pivot label brand and so both both are doing well the best retailers have a good mix of the national brands in their own private label brands. So we don't think it's a function of trading down. We think it's just a function that's where people are shopping right now because theyre going for the groceries are going for one stop shopping the picking up all the essentials, we don't sell diapers, we don't sell formula.
They do and they're benefiting from the consumer.
<unk> for one stop shopping given the higher gas prices and other challenges on the budget.
And I guess, one final thought on that as we look at pricing.
That most consumers spent about $700 a year.
For apparel for their child, and our price increases this year through inventory management and actual price increases is probably some portion of 5% so 5% on $700 a year is about $35 a year less than one dollar a month.
Yes, it was less than $3 a month in terms of their monthly budget and so we don't think kids apparel is putting pressure on the families with young children I think theres other things weighing on them, but we don't think our price increases are our pricing is is one of those challenges.
But as more consumers are gravitating towards some of those exclusive brands, which are lower priced.
Maybe they are looking for cheaper alternatives versus the core.
Again, it's our exclusive brands business was under pressure, it's the best performing part of our business right now, we're benefiting from that traffic to target Walmart and Amazon.
Okay. Thanks, guys. Good luck you're welcome.
Hello, Ladies and gentlemen, this does conclude the Q&A portion of today's conference I'd like to turn the call back over to Mike Casey for any closing remarks, well. Thank you all very much for joining us. This morning, we look forward to updating you again on our progress in July .
Goodbye, ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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