Q2 2019 Earnings Call
Welcome to Carter's second quarter 2019 earnings conference call on the call today are Michael Casey, Chairman and Chief Executive Officer.
Westenberger Executive Vice President and Chief Financial Officer.
Brian Lynch President Sean Mchugh.
Vice President and Treasurer after todays prepared remarks, we will take questions as time allows.
Orders issued its second quarter 2019 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 <unk> Dot Carter's Dot com.
Before we begin let me remind you that statements made on the conference call.
[laughter] materials about the company's outlook plans and future performance are forward looking statements actual results may differ materially from those projected.
Discussion of factors that could cause actual results to vary from those contained in the fourth looking statements. Please refer to the company's most recent annual report filed with the Securities and Exchange Commission and the presentation materials posted on the company's website.
On this call the company will reference various non G.A.P. financial measurements, a reconciliation of those non G.A.P. financial measurements to the G.A.P. financial measurements is provided in the company's earnings release.
Also today's call is being recorded and now I would like to turn the call over to Mr. Casey. Please go ahead Sir.
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.
We exceeded the sales and earnings goals that we shared with you on our last call.
Our growth in the quarter was driven by our retail and wholesale segments.
International sales were a bit lower than last year and reflects the change in our model for China.
Our profitability in the second quarter reflects the strength of our product offerings better price realization and good control over spending.
The second quarter got off to a good start we had the combined benefits of a late Easter holiday and transition to more spring like weather in many parts of the country. We saw mid double digit growth in sales in April with comparable retail sales up 17%.
As we expected may was a tougher comparison to last year and we had good sales growth in June the largest month of the quarter driven by comp store sales and the launch of our summer product offerings July also got off to a good start with strong demand over the fourth of July holiday.
In our retail segment comparable sales growth in the second quarter was at the high end of our 3% to 4% forecast and reflects good demand for our new product launches, including little baby basics. The core component of our Carter's brand, providing the everyday essentials for families with newborn children.
The level of promotions in the quarter were bit higher than last year, which we expected given the shift in the Easter holiday.
We continue to see the strongest comparable sales growth in our co branded stores and mall based stores.
Given this positive multi year trend in performance, we plan to continue improving the mix of our store locations by opening co branded stores in more densely populated markets in closing underperforming standalone outlet stores as leases expire.
As we shared with you earlier this year, we saw a nice lift in sales in our outlet stores co located with Jim Murray during their store closure sales. We're now seeing a lift in our non outlet stores sales in centers, where Jim Murray has closed.
Historically, the largest component of Jim Breeze product offering within the toddler age segment.
Carter's has the largest share of the $5 billion toddler apparel market with 13% share twice this year of our nearest competitor.
Given our strength in this portion of the market. We believe we are well positioned to capture a meaningful share of the former Jim brings store sales.
As we shared with you earlier this year, we believe gymboree closures provide a new $100 million growth opportunity for us.
To pursue that opportunity beginning this year, we plan to open 100 co branded stores in mall locations over the next five years.
Children's apparel is a traffic driver to malls and we plan to very selectively pursue the better mall store opportunities.
This plan reflects our multi year evolution away from declining outlet centers in order to improve the convenience of shopping for the two best known brands in young children's apparel.
We saw good growth in our e-commerce sales in the quarter driven by demand from us consumers that growth was partially offset by lower demand from international consumers shopping on our U.S web site.
We believe the stronger dollar has weighed on international demand for our brands posted both in tourist store locations and online.
Based on forecasted exchange rates for the second half we are expecting a stabilization in demand from international guests and double digit growth in our e-commerce sales in the balance of the year.
In recent years, we've made significant investments in technology, which have among other things enabled us to offer free shipping everyday on ecommerce purchases.
After extensive testing last year, we recently launched a new service, which offers the same day pickup of ecommerce orders.
Within a couple hours after an e-commerce order, we can now texstar customers to let them know their purchases available for pickup in our store located close to their home.
Many of those customers picking up their online orders made an additional purchase during their visit.
The response to this new service has been very positive with sales trending better than planned.
Other investments in recent years have enabled us to make the full scope of our online product offering available to customers shopping in our stores. If for some reason a store is temporarily out of stock. We can meet the consumers' needs complete the transaction in our store and then ship the product directly to their home for free.
We have the largest chain of specialty stores focused on young children's apparel in the United States from Maine to Hawaii.
To meet the increasing expectations for free shipping and fast delivery of E. Commerce orders, we plan to launch a new capability in the second half this year, which will enable our stores to fulfill the ecommerce orders.
Collectively we expect these new omnichannel capabilities will improve the convenience of shopping with us.
Drive more traffic to our stores and improved the speed and lower the cost to serve our e-commerce customers.
To further improve the experience shopping with us in the second quarter, we launched a private label credit card to provide our customers with an enhanced loyalty program.
Over the past year, we evaluated the potential benefits related to a credit card program and determined that it may deepen the connection with our customers increased the frequency of visits and increase the lifetime value of the relationship.
Among other things our credit card customers will receive free shipping on all card purchases double points to earn rewards faster and advance notice of sales events.
With respect to our wholesale business, we had good growth in sales and profitability in the second quarter. We continued to see an acceleration in demand for our exclusive brands with target Walmart and Amazon.
Over the past year, we've worked with target on a plan to strengthen the market presence of our flagship Oshkosh B'gosh brand in target stores and target Dotcom two of mom's favorite places to shop for young children's apparel.
In April we launched our Oshkosh, B'gosh brand with target and over 600 doors.
Selling today is exceeding expectations.
We're planning expansion with targets over 1000 doors beginning in spring 2020 .
For generations, our brands have been known for their strong value proposition great quality at a great price.
Wherever you are shopping for young children's apparel, you'll likely see a strong presentation of our brands.
We consider ourselves fortunate to have deep and enduring relationships with the best retailers of young children's apparel in the United States.
With their support our distribution in over 17000 retail store locations has enabled us to extend the reach of our brands to more families than any other company in young children's apparel.
Among others, we believe Kohl's has done an exceptionally good job presenting the very best of our Carter's brand across our baby sleepwear and playwear product categories with a strong brand presentation heading into the back to school season.
Carter's is the best selling young children's apparel brand in the related $5 billion ecommerce market.
Together with our wholesale customers, we expect to exceed $1 billion in online consumer purchases of our brands next year.
In our international business sales were a bit lower in the quarter due to the change in our business model for China.
Our new licensing partner has assumed full responsibility for our previous relationship with T Mall.
This new model has enabled us to de risk our entry into this important market with a partner that has demonstrated expertise building a successful retail business focused on children's apparel in China.
As this new business model evolves, we will share more about their progress with you.
Canada is the largest component of our international business. It second quarter sales are comparable to last year, we had good growth online and slightly negative store comps attributed to persistent cold weather.
Its product offering in the second quarter was geared to more spring like weather, which arrived later than expected.
We had good sales growth in Mexico.
We plan to replicate in Mexico. The successful multichannel model, we've built in the United States and Canada.
In the second half of this year, we plan to open four co branded stores in Mexico modeled after our best performing us store model.
We also plan to launch ecommerce capabilities in Mexico by the end of the year from our perspective, the ecommerce market in Mexico with several years behind relative the United States in terms of broad use for children's apparel purchases.
With a relatively small investment we can begin to connect with more consumers online and build a good database of customers in Mexico.
We also had good growth with our international wholesale partners in the second quarter. These are good retailers, including Walmart Cosco and now Amazon doing a beautiful job presenting our brands to families with young children in over 90 countries.
With respect to our supply chain performance, our sourcing team has helped us mitigate the potential impact of list for tariffs.
Our and mitigated exposure to those tariffs was estimated to be about $100 million on an annual basis.
Since our last call with you.
We have accelerated the receipt of products from China to the United States.
We have reduced the mix of China source products from 26% last year to less than 20% this year.
Developed a plan to further reduce our production in China if needed.
And negotiated price concessions expected from our suppliers if list fourq tariffs are imposed.
Cumulative effect of these efforts has meaningfully reduced our exposure to additional tariffs on China imports and reduce the level of price increases that would be needed to fully absorb higher product costs.
It is clear to us that the threat of tariffs has weighed on our suppliers who have done an exceptionally good job for us over the past 20 years.
The silver lining in this threatened disruption may be more abundant capacity in China at our cost objectives than would have otherwise than possible.
Since our last call with you we have negotiated lower product costs for spring 2020.
Cotton and oil prices are lower than last year and labor costs are higher but in our experience manufacturing capacity is the more significant driver of our product costs and the markets reaction to tariffs on China imports has enabled a more favorable outlook for product costs in 2020.
The tariff exposure is a fluid situation, but we believe we are well prepared to respond and mitigate the impact on our business. If additional tariffs are imposed.
Given our first half performance and plans for the second half we are reaffirming our previous outlook for sales and earnings growth this year.
We expect low single digit growth in each of our retail wholesale and international segments in the second half.
Our retail business is expected to benefit from a higher mix of co branded stores, including 15, New mall stores to capture former Jim restore sales and we will have fewer underperforming stores, which were closed over the past year.
We are meaningfully improving our websites this summer enhancing the presentation of our product offerings search capabilities and checkout experience.
We also expect to benefit from our new Omnichannel capabilities and an easier comparison this year to labor day holiday sales last year.
In wholesale we expect to see continued momentum in our exclusive brand sales, including greater demand for our toddler age product offerings.
And in our international business, we're forecasting better trends in Canada based on improvements in its product offering and continued progress in Mexico.
In the second half earnings are forecasted to grow at a rate faster than sales given the strength of our fall and holiday product offerings.
A good inventory position.
Progress with our pricing initiatives and continued control over discretionary spending.
As we've seen over the years, our business model has shifted more to direct to consumer and as a result, our growth is more weighted to the fourth quarter.
Over the past three years, we've managed to grow sales by 5% or more in the largest quarter of our year and we believe we have the ability and resources to enable that level of performance again this year.
I would like to thank our employees throughout the company, who helped us achieve our forecast in the first half with their support we expect 2019 will be another record year of sales and profitability.
Richard will now walk you through the presentation on our website.
Thank you Mike good morning, everyone.
I'll begin on page two with our GAAP income statement for the second quarter.
Our reported results in the second quarter and first half included some unusual items, which are detailed in our press release today.
Morning, we will mostly speak to our results on an adjusted basis, which excludes these unusual items for greater comparability.
Today's presentation and earnings release provide reconciliation reconciliations of our GAAP basis results.
To the adjusted basis of presentation. Please review this information as you evaluate our results.
Moving to page four with some highlights for the second quarter.
Consolidated net sales grew over 5% year over year, driven by good growth in our us retail and wholesale businesses.
The U.S. retail comparable sales were strong with growth of nearly 4%.
Profitability increased nicely in the quarter with adjusted operating income up 12%.
And adjusted earnings per share up over 20%.
Turning to our adjusted Pant outfit, a second quarter on page five.
Net sales were $734 million up nearly 5.5% versus last year.
Foreign currency exchange rate movements were a modest headwind in the quarter, reducing our net sales by approximately $10 million.
Our us retail and wholesale segments, both recorded solid topline growth.
International segment sales declined modestly.
In part due to currency movements.
I'll cover our individual segment results in more detail in a moment.
Gross margin was 44% down about 50 basis points compared to last year.
Gross margin benefited from lower inventory provisions than last year, but was pressured because of our pricing actions in total did not fully cover the impact of higher product costs in the quarter.
Gross margin also declined due to changes in customer mix within us wholesale and higher shipping costs within the ecommerce channel.
Adjusted SG and anchor a 2% achieving 120 basis points and leverage over last year.
Expenses were well controlled during the quarter.
We also had some favorable timing and SGN AG as some planned second quarter spending is now expected to take place later in the year.
Our adjusted operating income grew 12% with a 50 basis point expansion in adjusted operating margin.
Below the line second quarter net interest and other expense was comparable to last year at $9 million.
Lower foreign currency losses, offset higher interest expense related to higher market interest rates and the refinancing of our senior note.
Our second quarter effective tax rate decreased to 21.1% compared to 22.8% last year, principally a result of recent clarifications at certain aspects of the 2017 tax reform legislation.
For the full year were expecting our effective tax rate to be largely comparable to 2018 at approximately 21%.
Our average share count declined 4% compared to last year, reflecting the benefit of our use of capital for share repurchases.
So on the bottom line second quarter. Adjusted EPS was nine was 95 cents up 21% compared to 79 cents last year.
Page six summarizes our first half adjusted result, this year's first half net sales grew 2% and adjusted EPS declined approximately 3%.
Changes in customer mix within us wholesale and higher e-commerce shipping costs reduced gross margin in the first half of the year.
Spending in the first half was very well controlled and was comparable in total to last year.
Turning to page seven with a recap of our balance sheet and cash flow.
Our balance sheet and liquidity continues to be strong at the end of the second quarter, our cash on hand and available capacity under our credit facility totaled approximately $750 million.
Net inventories at the end of the second quarter grew 5% compared to last year consistent with our prior forecast.
We ended the quarter with a meaningful improvement in our excess inventory position versus last year.
We are forecasting mid single digit increases in net inventories for each of the remaining quarters in 2019.
Operating cash flow in the first half was $104 million roughly comparable to last year for fiscal 2019, we are forecasting strong operating cash flow in the range of $375 million to $400 million.
Capital expenditures in the first half for $25 million most of the spending related to investments in new and remodeled stores and information technology initiatives.
We are forecasting another good year of investment in the business with full year capex forecasted around $80 million up about $20 million over last year.
The increase relates to investments in retail stores retail technology, including refreshing, our ecommerce website and experience and other enterprise technology initiatives.
In the first half we returned a total of $138 million to shareholders comprised of $92 million and share repurchases and $45 million in dividends.
Since 2007, we have returned nearly $2 billion to our shareholders.
Now turning to page nine with an overview of our business segment results in the second quarter.
Our consolidated adjusted operating margin was 8.7% up 50 basis points over last year.
Each of our business segments achieved improved margins in the second quarter I'll provide some additional detail on our second quarter segment results in a moment.
We've included our business segment results for the first half for your reference on page 10.
Turning to second quarter results for the U.S. retail segment on page 11.
Total us retail segment sales grew over 5% in the core in the second quarter.
Total comparable sales grew 3.8%.
We estimate that the Easter calendar shift benefited Q2 comps by approximately two points.
Normalizing for the shift in Easter the comps and the combined March April time period were up about 5%.
We continue to make progress in optimizing our store portfolio in the first half we opened nine new stores and closed 20, ending the quarter with 833 stores in the United States.
For the full year, we plan to open approximately 45, new stores, we will likely close a handful of additional stores. This year beyond the 20, which we closed in the first half.
Consistent with our recent experience co branded and mall stores were our best performing store types in the second quarter with both comping meaningfully better than the chain average.
Our buy online pickup in store capability, which provides our customers with same day in store fulfillment of their online orders is now available nationwide.
Customer response to this service has been good with adoption rates running ahead of our forecast.
Lastly, later this year, we will pilot the fulfillment of online orders directly from our retail stores. Our objective is to shorten delivery times for ecommerce customers furthest away from our distribution center here in Georgia, better leverage our inventory and increased store productivity.
U.S. retail segment margin was 11.9% in the second quarter, an improvement of 60 basis points over last year.
For full year 2018, we're finding us retail segment net sales to grow in the low single digits, along with operating margin expansion.
On page 12, we have included a photo of a new co branded mall store, which we opened in May and the Houston Galleria.
Performance to date has been very strong.
Just outside the Galleria, we happen to have an existing Carter's store. So far we have not seen cannibalization of dislocation from the new store inside the mall. We're encouraged by this as we evaluate opening additional mall stores.
On page 13, we have included a picture of a new presentation of our core baby product in our retail stores in the us.
This new baby experience as we're calling it was created in support of this year's little Baby basics assortment launch and is intended to showcase the beauty of our baby apparel, while bringing together related essentials and gifting items, such as plush toys and blankets.
We've seen a nice lift in the performance of baby apparel and these related accessories. Since this new presentation was rolled out.
We believe this new presentation strengthens our position in the baby category as the clear market leader with our market share of 24%, which is nearly five times that of our nearest competitors.
On page 14, Weve summarized some details of our new private label credit card, which Mike has discussed we're excited about the potential of this new program and look forward to sharing more about it with you overtime.
On page 15, our brands, particularly Carter's continued to lead the way and customer engagement on key social media sites, such as Facebook and Instagram.
Our marketing and merchandising teams collaborate extraordinarily well and presenting our products and engaging with consumers across social media.
Getting closer to the back to school shopping season and on pages 16 to 19. We've included some of our back to school marketing for Carter's and Oshkosh.
Pages, 16, and 17 showcase Carter's toddler product category, where we have the leading market share and Carter's because product, which we successfully introduced a year ago.
Pages 18, and 19 are all about Oshkosh, highlighting the iconic denim heritage of this brand as well as new product offerings, which serve families who are looking to meet school uniform and dress code requirements.
Let's get pop brand is also focused on having a strong back to school season page 20 features our successful new character products for kids, including character backpacks and corresponding mealtime products.
Turning to page 21 with results for our us wholesale business in the second quarter.
We had a very strong quarter in U.S. wholesale with sales up 9% over last year.
In the quarter, we saw we saw strong demand and over the counter performance for spring and summer seasonal products.
Continuing the trend from the first quarter, we experienced strong demand in the second quarter for our exclusive brands available at target Wal Mart and on Amazon.
Segment operating profit grew 16% to $35 million compared to $30 million last year.
Segment operating margin improved by 90 basis points to 15.4%.
This margin performance reflects lower inventory provisions marketing spend and bad debt expense.
These benefits were somewhat offset by changes in customer mix and lower royalty income.
We continue to focus on several key areas to drive the performance of our us wholesale business.
Including improving in store presentation of our brands supporting our customers ecommerce growth and growing the penetration of of our older age Assortments with these retailers.
For full year 2019, we expect low single digit topline growth and our yes wholesale business with earnings roughly comparable to last year at an operating margin of approximately 20%.
Page 22 shows one of our new Carter's shops at Kohls. This is a good example of our commitment to invest in brand presentation with our wholesale partners.
As Fixturing and brand imagery is designed to drive higher productivity and highlight the strength and beauty of the Carter's brand.
Results to date have been very positive and we're planning to roll out additional Carter shops at kohls in the third quarter.
Turning to page 20 trace Mike mentioned, our recent introduction of the Oshkosh brand at target.
We're encouraged by the early results of this initiative and believe it will be another good opportunity for us to grow our business in the toddler space and will be an element of capturing the former gymboree store sales opportunity.
Moving to page 24, and international segment results for the second quarter.
International segment net sales declined 3% on a reported basis and were roughly comparable on a constant currency basis.
In Canada total retail comp sales increased 1%, but overall retail sales were below our expectations ecommerce demand in Canada was strong with online sales growing over 20%.
So our comps declined reflecting lower store traffic, which we believe was influenced by the persistent cold weather in them in this market.
Our business in Mexico continues to perform well second quarter net sales grew over 30% with very good performance in both the wholesale and retail channels.
As Mike said, we're just about to open our first larger co branded store in Mexico, replicating our store model, which has proven successful in the U.S. and Canada.
International segment adjusted operating income was comparable to last year at $4 million.
Segment operating margin improved by 10 basis points to 5.2%, reflecting the absence of losses in China offset by a lower contribution from Canada.
For full year 2019, we expect net sales in our international segment will be comparable to last year with improved profitability.
Hey, just 25 through 27 highlight our expanding global footprint with our international partners.
This component of our international business is comprised of approximately 40 partners operating in over 90 countries.
These international partner relationships are important to us as they help us to profitably meet consumer demand for our brands and markets beyond North America.
The photos on these pages show the first ever Carter store locations in India, Argentina and Russia.
Collectively our international partners are currently operate over 800 retail locations around the world.
Our brands are also available in over 1000, additional Walmart and Cosco retail store locations outside of the United States.
Moving now to our outlook for the balance of the year beginning on page 29.
We're focused on delivering a strong second half with good growth in both net sales and earnings.
We have summarized here some of those factors, which we believe will drive our performance in the second half, it's a long and meaningful lift which we believe supports our plan to build on the strong second half and fourth quarters in particular that we have delivered over the past few years.
In terms of our specific plans for Q3 and full year on page 30.
For the third quarter, we expect net sales to increase approximately 1%, we're forecasting low single digit comps in our us retail business and comparable sales in our international business.
Sales in our us wholesale business, our planned down in the low single digits largely due to the timing of shipments were planning very good to us wholesale sales growth in the fourth quarter.
We expect third quarter adjusted earnings per share to increase approximately 3% to 4% compared to adjusted EPS of $1.61 last year. This outlook reflects gross margin expansion.
And modest growth in SGN over last year.
For full year 2019 today, we are reaffirming our previous guidance, we expect net sales growth of approximately 1% to 2% and adjusted earnings per share growth of approximately 4% to 6%.
Andrew we're expecting another good year of cash flow generation.
Risks were monitoring include the success of our marketing and pricing strategies the level of international consumer demand in our us retail businesses that performance of our wholesale customers and the status of trade negotiations between the United States and China.
And with Dave's remarks, we're ready to take your questions now.
Thank you Jim if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to second.
And our first question comes from Heather Balsky with Bank of America.
I guess to start I was hoping you could just talk about the promotional environment right now, especially now that you're past the temporary closures and liquidations.
And how your competition you see.
More rational players I guess in this environment. Thank you.
I'd say the promotions in the second quarter were generally in line with what we had expected Easter came later this year and so the promotions are typically higher when you are not.
Holiday event, I'd say may make promotions were bit higher because may generally was a tough month for many retailers.
A bit of a post holiday low and I think cooler weather returned in May June for US was particularly good promotions for us in June were lower year over year lower than the previous two months in the second half we expect our promotions will be comparable year over year still a lot of noise in the market, but I would say inventories. The promotions are largely a function of the quality of the inventory our inventories are in good shape. So we feel good heading into the second half of the year and we're expecting a level of promotions comparable year over year.
And just a follow up in terms of I guess your wholesale partners. How do you feel about the health of that inventory right now.
Very good very good they're in good shape.
Okay, and one last follow up which is the M&A shift could you help quantify that.
Sure It was probably around four or $5 million, we believe will shift into the second half from from second quarter, great. Thank you very much.
Welcome.
Thank you. Our next question comes from Paul ligands with.
City.
Hey, guys.
Curious if you could maybe quantify a little bit more the.
Gross profit.
Changes that you saw by by channel, both retail and wholesale and specifically.
Wonder if you could talk about gross margin on a year over year basis by channel retail versus retail wholesale versus wholesale curious about the what's going on behind the scenes on the gross margin line. Thanks.
Well I don't know that obviously could add by by business.
Consolidated as we mentioned it was down about 50 basis points. There were a number of drivers to that we continue to have an ongoing kind of mix shift within the U.S. wholesale business.
That is in part due to just the strong demand, we're seeing from the exclusive brands, which switched.
Collectively our a lower gross margin business, that's a terrific operating margin business for us, but it's a bit lower on the gross margin front, we had very good wholesale growth as we said 9% in the quarter.
Retail margins also also were strong we continue to see growth coming from E Commerce, which is a very good gross margin business for us.
Probably had a bit more off price channel activity in the second quarter than we've had a year to date.
That's more of an issue of the timing of when that product gets it gets liquidated in the market I'd say the outlook for gross margin is good we are planning for gross margin expansion in the second half there's a number of things driving that Mike went through a number that the second in the second half drivers, we think our inventory position is in great shape.
We bought inventory in the retail channel more conservatively to the second half.
I think that will be that will be important for us. We do think in the wholesale channel that will be less and less of that off price channel clearance activity than we had a year ago. So I think the outlook is is good and we're planning for consolidated gross margin expansion in <unk> in the second half.
Got you and then you mentioned I think low prices as you look out to the spring of 2020 any way you can quantify that for us.
Lower product costs, and lastly, all right.
Low low single digit product costs decreased as expected for spring 2020.
Bad side are you seeing down low singles.
Correct.
Yes. Thank you good luck guys.
Thanks very much.
Our next question comes from Susan Anderson with B. Riley FBR.
Hi, good morning, nice job on the quarter.
I was wondering if you could so I think you said that pricing and the head rolled out in second quarter I think it should be fully in place in third quarter. So I'm, assuming a better benefit on gross margin, maybe if you could give your thoughts around that and then.
I think you said July is off to a good start did you say what your stores are comping quarter to date.
222 questions there on the pricing, yes, I think when we comment as we had a we took some pricing action in the first half it did not totally cover the cost increases we had our realized pricing the pricing actions or were more strategic in the second half more fulsome and and we expect those to more than cover the cost increases in the second half we feel good about that.
In the Cup comps third quarter, David is the third quarter got off to a very strong start we had high single digit.
Comps over the fourth of July holiday and typically as you see as a post holiday law all that together with the the heat wave in important markets in recent weeks, we've given some of that back but we're currently running positive comps for the third quarter.
Great. That's helpful. And then I guess another question on the wholesale in second quarter or the upside there and I guess, how much of that was due to the greater replenishment versus the timing shift and then I guess as we look out to the third quarter and because of the timing and the negative growth there.
I guess I was trying to factor in you guys should be getting a benefit just from toys that toysrus pressure being gone on so I guess, how much of a benefit should you get to offset that thanks.
I'll speak high level I think we feel good about the wholesale business, we were up low single digits in the first half we expect to be the same in the second half.
I would say that retailers have been playing their business more conservatively, particularly in the Carter's brand our replenishment businesses have been very strong so we talked about.
The the three exclusive brands that that business has been surging our business with Amazon is growing very rapidly simple joy sales are really strong. We had we had really good prime day success three times the sales of last year on Prime day, and all of our brands were up meaningfully and I think it's it's noteworthy that the most accounts and our own retail business also saw demand surged during prime day. So we're we're optimistic about that business, but I would say the upfront bookings have been more conservative and that business has been driven by a replenishment businesses in exclusive brands and with our little baby basics business and with our skin business going forward.
Great. That's very helpful. Thanks, So much good luck next quarter.
Thank you.
Our next question comes from Ike Boruchow with Wells Fargo.
Congrats on a good quarter.
Just on sales can you guys kind of discuss what you're expecting the rest of the third quarter. Obviously sounds like July is off to a good start but as we get into the back half I think we're lapping a down 20% labor day weekend.
And then on wholesale can you just quantify the timing shift impacting threeq, you and I have a quick follow up on margins.
We are forecasting.
As we said a wholesale sales in Q3 down low single digits, our forecasting retail growth is up low single digit and comparable sales and an international I'd say most of the timing shift as it relates in Q3 relates to that off price channel activity that normalizes a bit as we move through the second half. So very good growth planned in the fourth quarter and that's that's what we're focused on delivering right now.
Okay, and then on margins can you go into more detail on the cadence of gross margin for the back half should we be expecting similar levels of improvement in each quarter and then what.
The $4 million to $5 million machine a shift into threeq is that.
On marketing or what what line item is that on fresh.
Yes, you know it's a it's a few items certainly marketing we felt like it was an opportunity to move some of that spend in the second half or are there other areas would be I, just im deferred hiring some technology projects, which are shifting more from original planning in the first half now those will those will take place in a in the second half.
In terms of gross margin, we are planning a gross margin expansion in both Q3, and Q4 and I'd say, it's roughly comparable in terms of basis points year over year.
Okay. That's helpful. Thanks, guys.
Sure.
Our next question comes from Omar Saad with Evercore ISI.
Thank you. Thanks for taking my question, Mike a couple of questions I wanted to.
Okay to dive in a little bit deeper on number one on real estate, maybe you could expand upon.
The strategy. It sounds like you are closing outlets, maybe deemphasizing that channel, but also opening mall stores, you know what you're seeing in that channel, especially post the temporary liquidation.
And then I also wanted to ask about.
The BOPUS initiative that you mentioned, maybe talk about how many stores you've rolled that out and how long it's been.
You know what you're seeing is a kind of a universal across the board the adoption rate and then maybe if you have any thoughts on especially since you guys offer.
Free shipping why you think your consumers are choosing to buy online pickup in store as opposed to get it in the mail. Thanks, Yeah. So on the real estate strategy again. This is a probably a 20 year.
Long strategy evolving out of the outlets the outlet stores years ago like we were our history, we're a wholesaler and like most wholesalers years ago, we had outlet stores and those outlet stores, we used to refer to as ATM machines highly profitable and we.
Knowing that only about 5% of kids apparel is bought in outlet stores. We started open that same model.
In strip centers, a a strip centers felt more like outlets to us and we've had very good success in the strip centers and always stayed away from malls, Oh, because the economics of the strip centers were more attractive, but the market has changed with that people exiting the malls new opportunities have arisen that we shared with you earlier this year when Jim Murray decided to close all their doors, our real estate team did a very good job evaluating a thousand mall locations and they edited out.
Probably 90% of them for variety of reasons, either the economics were an attractive and where there was weak co tenancy or the demographics are were not attractive meeting there weren't a lot of families with young children in the area of that mall, but they did identify some portion of about 100 mall centers that were worthy of consideration. So we're leaning into it and.
And it's largely because the economics are more attractive at the mall owners have reached out to us they see that children's apparel is a traffic driver to the centers and so Richard showed a beautiful picture of the Houston Galleria. This morning, just co branding an existing store.
As given that store a meaningful lift without cannibalizing a store located just outside of Carter store located just outside that Houston Galleria and so we'll probably open up at 15 mall stores and in the balance of this year, we already have about 50 more stores today, they're our best performing stores actually better performing than our co branded stores in strip centers. So we've got a little bit of visibility to what is possible. We'll open up 15 more of those 15 are good we'll continue to go down this path of opening up some portion of a 100 stores and these stores do.
On average a million dollars.
A year, so that's a new 100 million dollar opportunity in our retail business that we did not envision did not plan on I would say.
Earlier this year, but the gymboree closures gave US a reason to think differently about the mall store opportunity you opened Oh asked about BOPUS, Brian you want to comment on the Omnichannel initiatives, we'll talk about BOPUS and same day pickup BOPUS has been very popular.
As of those folks that picked up in the store about a quarter of those actually chose to purchase something else when when they're in the store. So we think it's a win for the consumers and for us.
That is chain wide and then we also just rolled out same day pickup and that with the nationwide rollout into Q2.
The customer response has been above the plan and really that's a that's up about speed the orders available and in as little as two hours to be picked up after she puts the order. After she places the order online. So I think a number of different things some folks want to ship to the house to someone is shipped to the store. We've still got two thirds of our customer the shop only in stores. So I think really the totality of the omnichannel initiatives within our retail experiences is what we expect to deliver good results going forward.
Good question White, why why apt to pick it up if you can get just get get it shipped to your home people like people of our stores and they like the instant gratification within a couple of hours. After ordering you have the convenience of shopping at home and then you also have the convenience of you can swing by within a couple of hours and pickup which need so.
Our stores are the best looking stores and children's apparel, so people people like to go to those stores.
Perfect. Thanks, Mike.
Thanks Omar.
Our next question comes from Jim Chartier with Monness Crespi Hardt.
Good morning, Thanks for taking my questions.
So first I would just wanted to kind of circle back to Labor day last year, I think you said weather and kind of marketing were the two biggest impacts so on the weather front anything you guys have done to the product assortment.
To make it a bit more wear now to limit the impact and then on the marketing.
Have you done anything differently year to date.
That gives you confidence that the changes you will make for labor day. This year, we'll work thanks.
Yeah. So so with respect to labor day as I recall, we got clobbered over Labor day last year and Labor day 2017, cool weather broke so we had an unusual surge and in demand for our brands over Labor day 2017 by comparison weather was unusually warm over labor day 2018, and so business was tougher so that was the biggest weakness in our third quarter last year.
It's hard to predict the weather has never ideal but to your question. There is our merchants are designers have done a first class job, making sure that our product offering is more responsive to weather patterns in that early fall period. So we have many more wear now choices short pants short short sleeve.
And so a highly responsive to what consumers are looking for.
Earlier in the season, the seasonal transitions are always difficult to forecast, but I think our teams have done a first class job making adjustments.
Both in the product offering in the marketing.
So that we're expecting a meaningfully better labor day holiday season, this year and I think we shared with you.
Labor day for US is the second largest holiday second only to the Christmas holiday. So it's a it's a meaningful by time, we update you again in October we will have a very good read on what kind of year.
2019 is shaping up to be.
Okay, and then on the fulfilled by store what percentage of E. Com sales do you expect will ultimately be fulfilled by stores.
And then one on the stores were shipping time as the biggest driver what's the current ship time on those orders and then how what do you think you can reduce that too.
Yes, so the high view here with all these wonderful omnichannel capabilities that have been put in place significant investments in technology.
We're forecasting next year some percent to 30% of our e-commerce customers will be taking advantage of one of either buy online and ship to store or buy online pick it up within a couple of hours or the capability of what we call endless aisle. So that if you're in the store and you see something beautiful and we don't have the size you need really up in the store will ship into your home for free and then the new capability fulfill from store. So we envision probably some portion of about 30% of our E. Commerce orders will take advantage of.
Of those new capabilities.
Great and then just the last question you mentioned that your mall based stores are the best performing is there in terms of best Comping stores or profitability as well thanks to comps with profits are rich as well the the four wall contribution is not dissimilar from the other stores, but the comps have been the richest.
Great. Thank you best of luck.
Thanks very much.
Our next question comes from Steve Mariano.
C.L. King and associates.
Good morning, everybody most of my questions have been asked and answered.
Talk a little bit about the royalty income line and why it was down year over year and when you think that the China business model change will begin to have a positive permanent impact on that line.
Then on royalty income that was down modestly Steve in the quarter.
Largely consistent with our forecast a couple of things that we mentioned the introduction of of Oshkosh at target that is replacing a legacy program what target that was more of a royalty arrangement. We've also in sourced some categories in the last year or so which.
Our our detrimental to the royalty income line, but their creative from a sales and margin part of the I'd say those are the two biggest drivers you add on China I don't we don't expect that the royalties from China will be meaningful over the next couple of few years. It's early days time will tell we're thrilled with the new partner, they're thrilled with the opportunity.
They're doing a first class job stabilizing and improving the T mall business. They just launched Carter's on VIP Dot com.
They are working with Cosco, they're ready to launch the Carter's brand with Cosco China.
Next month are pursuing opportunities with Walmart China.
They are presenting our brands at a trade show to appeal to.
Other wholesalers and so the focus this year I would say is on e-commerce and on wholesale and then.
Stores may come as early as next year, but its early days as it becomes.
A more meaningful in terms of activity and contribution will share that with you.
Very helpful. Thank you.
You're welcome.
Our next question comes from Laurent Vasilescu with Macquarie Research.
Good morning, Thanks for taking my question, sorry to beat a dead horse here, but can you remind us how July August and September perform last year. So we can see.
Factored this into our Q2 comp estimates and then with July called out as a strong start with fourth of July and then some.
Pullback were given back.
For the remainder we said we think that July was more like a mid single digit comp.
Well, it's too early to say with July July is going to be but we're expecting a two to three comp for the quarter and based on what we know today will will will we think thats possible.
Last year to answer your question, we had a up we had a slightly negative comp in July we had a one nine in August .
And our capital business in September So we finished last year for the quarter and <unk> 0.5 comp.
Very helpful. Thank you very much for that and then to follow up on a prior question can you parse out the dollar amount in the wholesale shift between quarters and then great job on the exclusive initiative can you remind us how much.
Of your wholesale business is tied to exclusive.
Any type percent contribution rate would be appreciated.
And Weve.
We don't disclose the exclusive brands, we don't we don't talk about individual customer relationship. So aren't don't think we can help you with that and in terms of quantifying further.
Probably not appropriate given our segment disclosures.
Okay Fair enough and then the one key presentation called out 45 store openings.
With closure of 25 for 2019 is that still the plan and how should we think about the cadence between Threeq and Fourq.
Yes, roughly that is the plan for for the full year.
And most of the cause irrs have taken place today to be a handful in the balance of the year.
And as Mike said, we're going to open about 15 of these new format mall stores in the second half.
Okay very helpful. Thank you very much and best of luck.
Thank you.
Our next question is from Jay sole with you yes.
Great. Thanks, so much.
First question is on the credit card program gives an idea just how fast you think you can ramp.
The credit card program up, especially with the rewarding moments loyalty club members and what it may do might have on sales and margin or reducing credit card fees.
Hey, Jay we're you know we just launched this thing is we've had a positive early response from our customers were really encouraged by the applications and the approvals and the spend per customer.
And I would just say you know too early to put numbers on our goal over the next few years is to have a meaningful amount of our retail sales on a card and it's a win for our customers because it's available credit for them you know they get free shipping loyalty points special offers and of course, it's a win for us because we had lower credit card fees.
What we hope to be incremental sales and really can establish a closer relationship with the customer. So we know that families come to us first when they have a baby new families. When when when they have that first child, and we think that the Carter's Kurt can really drive lifetime value.
For us with those consumers, so but too early to put a number on it we think it's meaningful but it's very early days.
Okay.
I guess and then maybe on Oshkosh at target can you just talk about when to sell in for that product began was at a twoq event and then you will see it ramp through Threeq and Fourq you before we lap it next year or do they really started in one Q.
It launched in April .
We launched in April it launched in our April ramp up so were we launched with over 600 doors and expect to expand over a thousand doors for spring 20.
Got it okay. Thank you then my last question is you it's been such a choppy year July 4th weekend very strong then it slows down and I think the whole year has been my guys, who are you benchmarking yourself versus.
Other retailers of children's apparel, because the environment's been choppy because you know we're talking about a 2% to 3% comp rate that's kind of been the growth rate.
First half of the year was little bit slower than that how do you sort of tell in this environment. How you are really performing and how your market share is changing versus everybody else out there well the high view, where we're competing at a 27 billion dollar market that market is probably down some portion of $1 billion over the past year, so call that some portion of about 4%.
In our business is growing.
So were we we Theres no Theres no company that has a broader presence of children's apparel in the United States. So wherever your shopper for kids apparel, you'll likely see a very strong presentation of our brands. So we are uniquely positioned to capture the consumer wherever she is shopping she likes to shop in outlets, where there were there we have a number one and number two market share it for children's apparel in the outlets or shopping at Kohl's, Macy's Walmart target Costco Cmes wherever you are shopping you're going to see a nice presentation. Our brand. So I think that's why we've done so well over the years theres been good economies tough economies. There has been a strong birth rates weak birth rates, but this will be our 30 onest consecutive year growth because were everywhere, we appeal to the masses from Macy's to Walmart everywhere in between so I think thats why weve done as well as Weve done. Despite the market challenges, we have a way to manage and deliver growth.
Got it okay. Thank you so much.
You are welcome.
Our next question comes from Tiffany Kanaga with Deutsche Bank.
Hi, Thanks, so much for taking our questions.
And launching the Oshkosh brand at target do you have a sense for the source for that floor space can you concern is it as the category is growing and taking more space or are you rebalancing <unk> versus your Carter's exclusive product and also how do you think about its positioning and price points versus cat and Jack and brushes Oshkosh in your own stores. Thanks.
Yeah, I'll talk a little bit about about Oshkosh. They were the Oshkosh brand overall, we do about $600 million in sales as a company and we're planning to sales and profits up this year. So we're happy to launch this in.
In target. This April we consider them one of the key apparel retailers, the United States and as Mike said, we had strong selling and 600 doors and we're going to spend over thousand.
I would say overall I don't know that I want to parse out targets individual strategy I will tell you in terms of our strategy. We target. We continue to have very strong business with all of our brands.
With our Carter's brand to target with with Oshkosh, selling is very good and also with our get pop brand. So we are not.
Necessarily losing space in the in the Carter's brands whatsoever or skip out.
To support this launch we feel good about our performance we've met with the target teams recently and they've been very complimentary of other performance. They do a great job with their with their brands they've launched several different brands and new one even the last few weeks or there are some of the best retailers out there. They do an excellent job, but I would say over the last few years the way I would benchmark as our sales to target continue to grow.
In an environment, where they have put additional emphasis on their private brands and done a really good job that we have grown as well. So the rising tide has lifted all ships and we feel good about our business there and we're excited about this new launch without cash.
Hi, Thank you so much.
Our final question comes from John Morris with D.A. Davidson.
Buddy congratulations on a great quarter, let me add that.
I wanted to just check my thought process here Directionally.
About the shift in the revenue growth, which I guess looks like it's out of Q3 and into Q2.
Maybe about two points worth of revenue growth because of the timing of the shipments.
Am I right in thinking that most of that's off price.
And am I right in thinking about that Directionally.
Or were there other shifts going on there on.
The revenue line and then a couple of quick follow ups.
I would say within the wholesale business there are always shifts between quarter end dates and that's why we're looking at a at the full year, it's probably the best Uh Huh.
The best benchmark that we can give you on we're planning low single digit growth in wholesale revenues will be down slightly in that segment in Q3, and then they rebounded pretty strongly and in fourth quarter, but for the full year planning good solid low single digit growth in that segment that that's how I would think about it off price is a component of that and.
Fortunately this year, we are forecasting less off price channel activity, given our inventory position given that we're comparing against the toys R. US babies R us liquidation a year ago.
We're well past that so that's how we think about it.
Okay. That's helpful. And then just to clarify earlier because on the SGN Hey.
SGN eight.
Shifting into the back half those those additional expenses is that going to be can you give us kind of a feel by quarter because I think.
Implied by one of the earlier questions was that that four to 5 million was going into Q3, but I don't think you guys said that I think you were saying, it's kind of fall into both quarters is that correct and how should we think about that.
Okay, I would say, it's going to fall into the second half I I don't think I'll parse it out between Q3 and Q4, we're planning for a low single digit SGN AD growth in the second half.
Yeah, and planning for some modest rate leverage as well that that's how we're thinking about the expense line.
Right.
All right. Thanks, good luck for fall.
Thank you very much.
This concludes today's question and answer session I will now turn the conference back over to Mr. Casey.
Okay. Thank you. Thank you all for joining us on the call. We look forward to updating you again on our progress in October Goodbye.
Thank you everyone. This concludes today's teleconference. You may now disconnect.