CRI - NYSE

Welcome to the Carter's Second 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 and Treasurer. After today's prepared remarks, we will take questions as time allows. Carter's issued its second quarter 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.carters.com. Before we begin, let me remind you that statements made on this conference call and in the Company's presentation materials about the Company's outlook, plans and future performance are forward-looking statements. Actual results may differ materially from those projected, and the Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the Company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials and earnings release posted on the Company's website. 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. I would now like to turn the call over to Mr. Casey.

Thank you, Tanya. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I'd like to share some thoughts on our business with you. Earlier today, we reported our second quarter sales and earnings, which are in line with the forecast we shared with you in April. For the third consecutive quarter, we saw higher-than-planned demand in our Wholesale segment. Our wholesale customers have been running leaner on inventories and in need of fresh new product to drive sales. In our Retail segment, comparable retail sales in the second quarter were in line with our forecast. Spring selling was sluggish earlier in the quarter with the late arrival of warmer weather. Thankfully, our retail sales picked up over the Memorial Day holiday weekend and that improved trend in sales has continued through July. And in our International segment, sales were a bit lower than planned, largely due to unseasonably cool weather in Canada. But similar to our experience in the United States, the trend in retail sales in Canada improved in June and has continued into July. As planned, inventory levels are down significantly in the quarter, and expected to trend even lower through the balance of the year. The mix and level of inventories were in good shape heading into the second quarter. And as a result, we were less promotional than last year. In the second quarter, we achieved a near record gross profit margin driven by the strength of our product offerings, improved price realization, lower inventory provisions and lower ocean freight rates. With lower inventories, cash flow year-to-date is meaningfully better than last year. That stronger cash flow enabled us to reduce borrowings and interest expense and returned over $100 million of excess capital to our shareholders through dividends and share repurchases through July. In terms of our outlook for the year, given the continued efforts by the Federal Reserve to reduce inflation and slow consumer spending, the resumption of student loan payments and a bit of caution, we have risk adjusted our previous guidance for sales and earnings this year. That said, we are forecasting a much better trend in sales and earnings in the balance of this year relative to our first half performance. We believe we had more challenging year-over-year comparisons in the first half this year than we will have in the second half. Recall that 2022 got off to a good start. Our wholesale customers and we believe that 2022 would be another good year of growth in the post-pandemic period, building off record performance in 2021. In the first half last year, our wholesale customers were building inventories in ordering our product offerings several weeks early to mitigate the risk of supply chain delays and port congestion. When the unexpected and historic inflation began to weigh on consumer demand, our wholesale customers aggressively work to reduce inventory levels in the second half last year. Those efforts included the suspension of automatic replenishment systems and cancellation of our planned shipments. To their credit, our wholesale customers were successful with their inventory reduction initiatives last year and entered 2023 in a good inventory position. In the second half of this year, we are comping up against that period of inventory destocking last year. Thankfully, automatic replenishment systems have been turned back on and replenishment trends for most of our brands have been better than planned this year. We expect other drivers of our second half performance this year will include a stronger product offering, including the expanded distribution of our new Little Planet brand, a greater contribution from our new stores, improved price realization, a significant improvement in on-time shipping performance, lower ocean freight rates and lower product costs. For the year, we are forecasting our sales down about 7% to last year. Our market analysis and credit card data continue to indicate that families with young children have pulled back on spending due to inflation. Our target consumers have an average household income of $75,000 a year. Our target consumers are women and men in their late 20s and early 30s, earlier in their careers and starting a family together. It was reported earlier this year that 60% of Americans are now living paycheck to paycheck. We believe it's fair to assume a higher percentage of families with young children are living paycheck to paycheck and have been particularly hard hit by inflation. Carter's advantages in inflationary markets are enabled by our focus on essential core products, our broad and unparalleled market distribution including our exclusive brands sold through Target, Walmart and Amazon and our compelling value proposition with an average retail price point of about $11, including many high-value multi-packs. Baby apparel contributes about 60% of our annual sales and continues to be our best-performing product offering. The latest data from the CDC suggest annual births in the United States in 2022 were comparable to the prior year. Earlier this year, market research indicated an improving trend in women expecting a child in the balance of this year. With a record number of weddings last year, the favorable trend in the annual births that began in 2021 maybe sustained in the years ahead. Carter's is the largest specialty retailer focused on young children's apparel in North America. Together with our international operations, our direct-to-consumer sales are expected to contribute over 60% of our annual sales this year. In the United States, our retail sales this year are expected to be down about 9%. Traffic to our stores and websites has been lower this year. We are seeing better performance in our stores than e-commerce. In the post-COVID period, people are more comfortable and enjoy returning to our stores. Store visits are more intentional shopping experience. By comparison, we believe e-commerce purchases are often stimulated by our e-mails or texts and our more impulsive purchases. Given higher credit card debt and family budgets challenged by inflation, we are seeing a lower-than-desired response online to our digital marketing efforts. We also believe our e-commerce performance reflects fewer margin erosive promotions this year. During the pandemic, we made margin driving structural changes to our business that enabled us to achieve record profitability in 2021. In recent years, we reduced low-margin SKUs. We have closed low-margin stores when leases expired and opened higher margin stores. We invested in inventory management and pricing capabilities, and we've meaningfully improved price realization and our gross profit margin. Our market analysis continues to show that our brands are competitively priced with higher costs driven by inflation, we've raised prices this year and so have our competitors. Our strongest competitors are private label brands. We believe the most successful retailers strike the right balance between their private label brands and national brands, and Carter's is the best-selling national brand in young children's apparel. No other company in children's apparel has the depth of relationships or success Carter's has achieved with the largest retailers of kids apparel, including Target, Walmart and Amazon. We believe that our retail performance this year reflects in part a consumer preference for one-stop shopping with retailers that sell groceries and other essential core products. The beauty of our business is that we have benefited from that channel shift with the success of our exclusive brands. Consumers expect to pay a reasonable premium for national brands. In our experience, as long as our brands are priced within a $1 or $2 of our private label competitors, we are competitive. It's a time-tested pricing strategy, which we plan to continue in the years ahead. Our best-performing brand sits side-by-side with the best-selling private label brand. The latest market data suggests that collectively private label brands comprise about 23% of the $29 billion young children's apparel market in the United States. It's up less than a point share. By comparison, Carter's share of the market, all of our brands is about 11% and comparable to last year. Our Carter's brand has over 70% more market share than the largest private label brand. To improve the convenience of shopping with us, we plan to open about 50 retail stores in the United States this year in high-traffic centers. We have opened 140 stores over the past five years. These stores are expected to contribute about $140 million in sales this year, with an EBITDA margin of about 25%. Our retail team analyzes the performance of our stores based on demographic data. As expected, stores located in the areas that have an annual household income over $100,000 are meaningfully outperforming our stores in less affluent locations. We use this data to inform our site selection process. We plan to open 200 or more high-margin co-branded stores in the United States over the next five years. We are planning a meaningful improvement in our comparable retail sales in the second half of this year. In our forecasting process, we see a more consistent trend in comps relative to 2021. 2021 was a period of optimism. We had access to vaccines, COVID restrictions eased, and families with young children were supported by unprecedented U.S. government stimulus payments. By comparison, 2022 was not a period of optimism. Last year, the benefits from government stimulus ended and consumer demand was weighed down by historic inflation. Assuming the trend in comps relative to 2021 continues, we are forecasting our comparable retail sales in the second half, down less than 10% compared to last year. Our third quarter is off to a good start with comparable retail sales down about 7%. For the year, we are forecasting U.S. wholesale sales of $1 billion, down 7% to last year. Across the board, our wholesale customers have planned 2023 conservatively given the slowdown in consumer demand. Their plans for 2023 inventory commitments were made starting in the second half of last year when inflation peaked at 9% and consumer spending slowed. Our wholesale customers like Carter's, saw the benefit during the pandemic of running leaner on inventories. Leaner inventories, drive better sell-throughs, lower clearance sales and improved price realization and margins. Wholesale sales trends are expected to improve meaningfully in the balance of this year. We are forecasting second half wholesale sales down 2%. Demand for our seasonal product offerings is planned down about 10%. By comparison, our replenishment sales are planned up over 10% in the second half. Our forecasted growth in second half replenishment sales reflects a comparison to some of our wholesale customers' destocking efforts last year. Our replenishment sales reflect the demand for our essential core products for baby apparel, including bodysuits, washcloths, towels, bibs, blankets and pajamas. These consumer staples are purchased in multiple quantities many months before a child is born and then replenish frequently in those early months of a child's life, given rapid growth in their first two years. These products are on automatic replenishment to keep the store fixtures filled and e-commerce inventories in stock. For the year, our international sales are forecasted to be about $450 million or 15% of our total sales. Our sales in Canada, Mexico and Brazil are expected to contribute about 85% of our international sales this year. The balance of our international sales are through wholesale relationships with about 40 retailers representing our brands in over 90 countries and through nearly 100 online platforms outside of North America. In Canada, we are forecasting lower sales this year. We have the largest share of the market in Canada. And like the United States, families with young children in Canada have been adversely affected by inflation. By comparison, we are forecasting double-digit percentage growth in sales in Mexico this year. The economy in Mexico is improving and the peso has strengthened relative to the U.S. dollar. The annual birth rate in Mexico is 50% higher than the United States and Canada. Consumers in Mexico are responding very positively to our beautiful new co-branded stores. Since acquiring our licensee in Mexico in 2017, we have opened 25 highly productive stores. We currently have about 50 stores in Mexico and envision 100 or more stores in this $3 billion young children's apparel market in the years ahead. We are forecasting high single-digit percentage growth in sales this year to our wholesale partner in Brazil, Riachuelo. Riachuelo has opened over 50 Carter's stores in recent years and is expanding the distribution of our Carter's brand beyond their 260 department store locations. They have had a good experience building our Carter's brand in Brazil's $3 billion young children's apparel market. Going forward, 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 are assuming growth in Mexico and Brazil will offset lower sales in Canada and other markets. Our supply chain continues to be a source of strength in our performance this year. On-time shipping performance has been excellent and enabled us to support earlier demand for our new product offerings in our Wholesale segment. Our supply chain team has negotiated meaningfully lower ocean freight rates, which will benefit our second half earnings this year. Product costs for our new fall and winter product offerings, will also be lower in the second half this year. That benefit of lower product costs will be partially offset by the sale of pack-and-hold inventory carried over from last year at a higher cost. We expect substantially all of our pack-and-hold inventory will be sold by year-end, most of which is planned to be sold direct to consumers through our Retail segment at good margins. Since our last update, our supply chain team has been focused on mitigating the risk of threatened strikes on the West Coast ports of the United States and Canada. Over 70% of our products now flow through East Coast ports. Given the status of negotiations and agreements between the dockworkers and port management, we do not currently expect any disruption in the flow of our products through the West Coast ports in the balance of the year. We are encouraged by the recent reports that UPS and its employees have reached a tentative agreement and a potential strike may be averted. UPS is our primary source for shipments to our stores and e-commerce customers. To mitigate the risk of a temporary work stoppage at UPS, we have arranged alternative shipping capacity, if needed, through the United States Postal Service and shipped more products into our stores to support our new fall product launches and back-to-school shopping season. With our inventory reduction initiatives in recent years, many of our store backrooms are light on inventory and will be used to support our store sales and e-commerce fulfillment, if necessary. In summary, we achieved our second quarter and first half sales and earnings objectives. We expect our sales and earnings trends to improve as we move through the balance of the year. My comments on our outlook for the year reflect the high end of our guidance this morning. Year-over-year comparisons become less challenging in the second half. A year ago, the lives of families with young children were disrupted by historic inflation and other global events and they began to pull back on spending. With time, we expect inflation will moderate to desired levels. Consumer confidence will recover and 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, return excess capital to our shareholders and be well positioned to benefit from the market recovery in the years ahead. I want to thank all of our employees for our stronger-than-planned performance in the first half this year. With their support, Carter's continues to be recognized as one of America's best places to work for diverse employees, women and new college graduates. I'm grateful for their commitment to help us 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 2 of our presentation materials, we've included our GAAP P&L for the second quarter. And on the following page, we have our GAAP P&L for the first half. Page 4 summarizes adjustments to our GAAP results in the second quarter and first half of the year related to organizational restructuring. Last year's second quarter included an adjustment for the cost to early retire pandemic-related debt as our liquidity and performance allowed us to deleverage and strengthen our balance sheet. This information is included for your reference. And this morning, I will speak to our results on an adjusted basis, which exclude these items. On Page 5, as Mike said, we achieved the forecast we shared with you on our last call. Net sales in the quarter were $600 million. Our U.S. retail comps declined 16%, consistent with our guidance of a decline in the mid-teens. Wholesale sales exceeded our forecast in the quarter driven by earlier demand for seasonal product. In the first half, we've seen also better-than-planned replenishment trends across most of our brands. International sales were a bit lower than we had forecasted, largely due to cooler weather, which affected consumer traffic in our business in Canada. Profitability, both operating income and EPS were above our forecast. Spending was well controlled and our strong cash position enables lower borrowing, which in turn led to lower interest expense than we had forecasted. The next page summarizes a few key metrics of our second quarter performance relative to last year. Second quarter sales and earnings were down. Our performance in the second quarter last year was relatively strong, although we began to see the significant impact of inflation on consumer demand, affecting sales in all of our channels. These effects continued to the balance of last year and through the current quarter. Our gross margin rate performance year-over-year has remained strong, but lower sales have led to lower gross profit dollars and expense deleverage, which have negatively affected our overall profitability. Page 7 includes the same sales and profitability metrics for the first half of 2023 versus last year. Year-to-date net sales were down 13% and adjusted operating income and adjusted EPS reached down 46%. The first half historically represents the lighter portion of the year with nearly 60% of our planned sales still ahead of us. Our P&L for the second quarter is on Page 8. On our $600 million in net sales in the quarter, we achieved a gross margin rate of 48.6%, an increase of 130 basis points over last year. The largest contributor to this gross margin expansion was our improved inventory position. A year ago, we took charges for excess inventory as the outlook for forward demand was softening. We have made good progress in working through excess inventory, and we've carefully managed inventory commitments to align with projected demand, which has resulted in a net benefit to the P&L this year. Additionally, to a lesser extent, we saw a benefit in the quarter from lower ocean freight rates. We expect this will be a more significant benefit in the second half of the year and beyond. Fixed cost deleverage on lower sales partly offset the benefits of lower inventory charges and lower ocean freight costs to our gross margin rate. Spending was well managed in the quarter below what we had forecasted and slightly down from last year. We saw a benefit in variable cost centers tied to sales as sales were lower, these expenses were also down. Offsetting these lower variable costs have been increased costs related to new stores and higher provisions for performance-based compensation versus a year ago. We will continue our focus on spending as we move through the second half of the year. Operating income was $38 million, ahead of our forecast, largely due to lower spending in the quarter. Below the line, interest expense was below last year and lower than we had forecasted. Our strong cash generation and liquidity in the quarter allowed us to repay the outstanding balance on our revolver. We also had a gain related to favorable movements in foreign currency exchange rates of about $1 million in the quarter. Our effective tax rate was 23.6%, up about 200 basis points over last year. We have 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 this year. Our weighted average share count was lower by about 2 million shares versus last year, driven by our share repurchases. On the bottom line, adjusted diluted earnings per share were $0.64 compared to $1.30 in the prior year. On Page 9, we've included our year-to-date adjusted P&L. Our first half performance was fairly consistent with what we are reporting today for the second quarter with the year-to-date period reflecting the challenging macroeconomic environment with inflation, higher interest rates and higher debt levels weighing on consumer demand and understandably, our wholesale customers have planned their commitments for this year cautiously as a result. On the next page, we summarize some highlights of our balance sheet and cash flow. Our balance sheet is in very good shape. Total liquidity was $1 billion, a combination of our cash on hand and having virtually all of the capacity under our $850 million credit facility available to us. Q2 ending inventory was $682 million, down 21% year-over-year. As we've said, managing inventory has been a key priority in this environment of more uncertain demand. The level of in-transit inventory has decreased substantially. Our supply chain team has done great work to get product here to the United States, which has put us in a good position to support the demand we have planned across our various selling channels. We expect overall inventory levels will continue to decline through the balance of the year, including inventory we packed and held last year as demand began to soften. Debt was down at the end of Q2. A year ago, we had $120 million in borrowings outstanding on our revolver. In addition to $500 million in senior notes, our leverage level remains low, about 2.9x on a lease-adjusted basis which, along with our substantial liquidity, provides us with significant flexibility. We have seen a significant improvement in operating cash flow versus a year ago, generating over $200 million this year versus a use of nearly $100 million last year. Working down inventories and other favorable changes in working capital are the principal drivers of this improvement. Our forecasts indicate 2023 will be a year of strong operating and free cash flow generation for Carter's. Year-to-date CapEx was $26 million, up about $10 million over last year, largely reflecting investments in new stores in the U.S., in Canada and Mexico. As Mike mentioned, we've been able to return meaningful capital to shareholders thus far this year through a combination of dividends and share repurchases. Turning to Page 12 and a summary of the performance of our business segments in the second quarter. As I previously mentioned, our second quarter consolidated net sales declined $100 million versus last year. The biggest contributor to this decline was lower sales in our U.S. retail businesses followed by U.S. wholesale. The decline in overall profitability was also driven by lower profitability in our U.S. Retail business. While profit dollars declined in U.S. wholesale, we saw a nice improvement in operating margin in this part of our business, which I'll describe further in a moment. Many in the industry are dealing with lower market demand and some firms have actually posted losses in this environment, while not what we had hoped to achieve, Carter's was solidly profitable in the second quarter and first half. Looking ahead to the second half, we are planning high teens operating margins and year-over-year margin expansion in all of our business segments. On Page 13, we summarize some of the performance drivers for each of our business segments in the second quarter. U.S. retail sales declined 15% as inflation continued to adversely affect consumer traffic and demand, comparable sales declined 16%, consistent with our forecast expectations. As warm weather arrived around the country, particularly in late May, we saw a meaningful improvement in our performance. This improved trend continued through June and through the month of July. Traffic in our U.S. Retail business is lower year-over-year, more so in the e-commerce channel than in our stores, recent performance trends in our stores have been very encouraging. The decline in Retail's operating margin was largely driven by expense deleverage. We were encouraged in the quarter by our continued success in improving price realization, which increased in the mid-single digits and by lower costs related to excess inventory and transportation. In U.S. wholesale, sales declined 17%, which was better than we had forecasted. Sales of the flagship Carter's brand were stronger, in particular, as some customers moved up demand for seasonal products and had greater replenishment demand than we had forecasted. Order cancellations were significantly lower than a year ago when most customers began taking steps to reduce their inventory commitments in light of the rapid onset of inflation and its impact on consumer demand. Expense deleverage was less of an issue in wholesale, given the low fixed cost structure of this business and profitability benefited from improved pricing and lower inventory and transportation costs. And international sales were down 8%, primarily driven by lower demand in our Canadian retail business. In addition to the ongoing impact of inflation, warmer spring weather was slow to arrive throughout Canada. As Mike said, we've seen an improvement in Canadian demand more recently. We saw lower sales in the wholesale component of international, which we've attributed mostly to changes in the timing of shipments. International's operating margin declined to 7.5% in the second quarter, largely driven by expense deleverage given the significance of our retail operations in Canada and Mexico within the International segment. A few factors positively affected international profitability, including improved price realization, particularly in Canada and lower inventory and transportation costs. On Page 14, we've included our first half adjusted segment results for your reference. On the next page, some recent consumer research highlighted some impressive attributes of the Carter's brand. Consumers rank Carter's highly across numerous dimensions, including Comfort, being a brand they would recommend and one which they know and trust. Unaided awareness of the Carter's brand is over 40%, an enviable metric among retail and consumer brands in the United States. Awareness on an aided basis climbs to well over 90%. On the next page, we've continued to be active in engaging consumers on social media. In the first half of 2023, we've tripled our number of followers on TikTok by creating engaging content, including educational videos featuring our talented merchants, helping new parents understand what everyday essential products they need for their new baby and collaborations with leading social media influencers. In April, we invited families on TikTok to join a scavenger hunt in our stores with hundreds of families participating. Nearly 90% of our TikTok followers are between the ages of 18 and 34, exactly the age group with which we want to be building relationships. On the next couple of pages, we have included some of our back-to-school marketing. Beginning on Page 17, we have images of some fall Carter's product with new offerings in activewear, denim and boys and girls fashion. Our assortments are oriented around value and durability. Attributes consumers have long associated with our brands. Despite the extremely warm temperatures around the country right now, early selling of fall product is off to a very good start. Back-to-school is an important shopping period for OshKosh. We've just introduced a new brand campaign for OshKosh specifically designed around getting kids ready to get back to school. This campaign is very high energy with video tailor-made for viewing on social media. And so far, we've had a terrific response from consumers. This great back-to-school campaign video is available on the OshKosh B'Gosh channel on YouTube. On Page 19, we've been enjoying another special moment with this summer with the OshKosh B'Gosh brand. Gucci approached us to create a very unique collaboration to bring two iconic brands together. Building on some of OshKosh's signature and legacy style elements, including the Hickory Stripe and the OshKosh Clover, Gucci has created a unique collection of products, which are available worldwide exclusively through Gucci. On Page 20, our Skip Hop brand, which is roughly a $100 million business, has established itself as a leader in multiple durable product categories. Building on its authority and leading market share in diaper bags, Skip Hop has developed new and innovative products in the bath, travel, playtime and infant toy categories. Skip Hop products in our retail business have performed very well in the first half and registry demand has been a bright spot as well. With buybuy BABY's exit from the market, we've seen an uptick in demand from other leading registry retailers such as Amazon and Babylist. On Page 21, returning to store growth this year has been an important priority for us. We are planning on opening about 70 new stores in the U.S., Canada and Mexico this year. We have photos of three new stores here, including some of our great Canadian team members cutting the ribbon on a new store in Ontario. We are seeing good real estate opportunities with developers and landlords eager to have our brands and the traffic they generate. New stores opened recently are tracking in line overall with our pro forma expectations. On the next page, we've told you on previous calls how excited we are about the momentum we are seeing in our Little Planet brand, which focuses on sustainability and a differentiated elevated product aesthetic. We planned 2023 to be a year of meaningful growth in distribution for the Little Planet brand with retailers such as Target, Macy's, KOHL'S and Babylist. Shown here is a beautiful new Little Planet presentation and a Target store in the Los Angeles area. Total points of distribution for Little Planet are planned to grow from just under 900 doors currently to over 2,000 by the end of the year, which includes expansion in our Carter's stores to a total of about 450 locations by year-end in addition to availability on carters.com. In a relatively short period of time, we believe Little Planet has become one of the best-selling brands in the market focused on organic materials and sustainability. Turning to our exclusive brands in the wholesale channel, beginning with the Just One You brand at Target on Page 23. Just One You is launching our semi-annual baby essentials assortment this week. This product represents the must-haves for babies and represents a meaningful replenishment program for Target and us. Just One You creative has been featured prominently across Target's website, social media and in-store marketing. Carter's exclusive brand for Walmart, Child of Mine launched new expanded event collections this year, including Halloween and the response from customers has been strong. We continue to strengthen the Child of Mine brand experience at Walmart, driving more fashion and newness for the Walmart consumer. We have a strong partnership with the Walmart team and are evolving our product presentation and marketing programs, and we see a meaningful opportunity to grow our share with this key customer moving forward. On Page 25, we've launched a new digital experience for our Simple Joys brand on Amazon this year. Our brand store, photography and digital content were enhanced to highlight the best of the season styles and year-round best sellers. Simple Joys was featured prominently on Prime Day and continues to be the best-selling brand for babies and young children on Amazon. Prime Day is a meaningful event that generates sales, which are a multiple of our typical weekly volume with Amazon. On Page 26, we saw good growth in Mexico in the second quarter. Mexico is an attractive market for Carter's. Our brands enjoy high awareness and equity with consumers, and it is a market with attractive demographics. Second quarter net sales in the retail portion of our business in Mexico were up in the high teens on a local currency basis. Consumers have responded well to the new co-branded stores we've opened in Mexico. We've opened eight new stores so far this year with another four stores planned in the second half. This would bring us to just over 50 locations in this important market. On Page 27, our partner in Brazil, Riachuelo, recently opened its 56th freestanding Carter store. Over the last several years, Brazil has become our largest international market outside of North America. In addition to freestanding Carter's stores, Riachuelo also operates over 260 shop-in-shops within its department stores. Riachuelo has been investing in the shop-in-shop locations, allocating additional square footage and branding assets. On Page 28 in our International Partners business, as Mike commented, our roughly 40 partners distribute our brands in over 90 countries around the world. Our partners do a beautiful job representing our brands in their market, in their stores and on their websites. And this business, which is largely a wholesale model, has proven to be a good margin, low capital investment way of increasing our penetration outside of the United States. Here, we have photos of new stores in two new markets for us, Ecuador and Vietnam. We are looking forward to building the Carter's brand with consumers in these countries. On Page 29, we recently issued our latest corporate social responsibility report. This report is available on our website and highlights our commitments and initiatives organized around three pillars: product, planet and people. We are making good progress on our ESG agenda. We've continued our transition to more sustainable and certified products, reduce the carbon footprint of our direct operations and supported our employees through our human resources and charitable activities. Our CSR activities have recently been recognized by Forbes, USA TODAY and Newsweek. Now turning to our outlook for the balance of the year, beginning on Page 31. Overall, we are expecting an improving business trend as we move through the second half of the year, which accounts for the majority of our annual business. There are a number of factors which give us confidence in our second half outlook, several of which we've summarized here. First, we are encouraged with the improvement we've seen in our retail business since late May and that the decline in retail sales year-over-year has lessened. Retail comps in the second half of last year were down 12%, which we believe will provide a favorable comparison for this year's business. We feel very good about the product our teams have developed for back-to-school and for the eventual arrival of cooler weather. Historically, the change from warm to colder weather has been a boost to business in the second half of the year. Our inventory position is in good shape to support second half demand, including plans to shift much more on time to our wholesale customers than a year ago when product delays were much more of a challenge across the industry. In the wholesale channel this year, second half compares to last year. When our customers were taking aggressive steps to lower their inventory positions, we believe stock of our products remains low in the channel, which should support improved demand this year including for our high-margin replenishment product. We feel good about the outlook for continued gross margin expansion. Under our new contracts, ocean freight costs are planned meaningfully lower than a year ago. We have modest pricing improvement planned for the second half. The realization of which we believe will be supported by how we've managed our overall inventory levels. We are continuing to scrub spending with a mindset of deferring what we can until we have better line of sight to sustained improvement in market demand. Regarding our specific expectations for the full-year on Page 32, we've modestly revised our outlook relative to what we shared on our last call. The Fed raised interest rates again this week, this increase as well as possible additional rate hikes may further impact the consumers' outlook and demand. In general, it's appropriate to be a little more cautious in this environment. So in terms of full-year sales, we now expect to be in the range of $2.950 billion to $3 billion. Adjusted operating income is now forecast in the range of $325 million to $340 million and adjusted EPS in the range of $5.95 to $6.15. As we said, we are expecting a strong year of cash flow with operating cash flow forecasted above $300 million. Regarding the third quarter on Page 33, we've listed here some of the drivers of our expected performance. We believe consumer demand will continue to be pressured by various macroeconomic factors, including inflation, higher interest rates and higher consumer debt levels. The resumption of required student loan repayments is a question mark at the moment, but this could further stretch our core consumers. In our wholesale business, we expect our customers will continue to be very cautious regarding inventory commitments. We believe the outlook for gross margin is positive with planned expansion driven by lower ocean freight and product costs and continued discipline in pricing and promotions. We are expecting net sales in the range of $770 million to $790 million. While we are expecting lower year-over-year sales in each of our business segments, we believe we will see improved performance over first half trends for the reasons we've mentioned. Adjusted operating income is expected to be in the range of $80 million to $85 million and adjusted EPS in the range of $1.45 to $1.55. One final page on our outlook on Page 34. I Overall, we are expecting a strong second half. As summarized here, we are planning for a meaningful trend change in our topline with overall second half sales plan down 2% to 4%, which compares to first half sales, which were down 13%. Again, last year's second half was meaningfully affected by the destocking efforts in the wholesale channel and lower demand in our retail businesses. And if we are successful with our plans, second half operating income would grow meaningfully over last year with an operating margin around 14%, nearly double what we achieved in the first half driven by improved topline and meaningfully lower distribution freight and product costs. And with these remarks, we are ready to take your questions.

[Operator Instructions] And our first question will come from Warren Cheng of Evercore ISI. Your line is open, Warren.

Hey, good morning. I was wondering if you can flush out the –

Good morning.

Hey, good morning. I was wondering if you can flush out the assumptions underlying that 4Q implied margin outlook. I think that's the piece the guidance that's jumping out to me a little bit. So I'm coming out with 400 basis points to 450 basis points of expansion. How much of that is tailwind from freight and that easier promotional compare? And I was curious if you can talk about the other key components underlying that function.

Yes. In terms of gross margin, Warren, expansion in fourth quarter is planned to be robust. I think you're in the neighborhood of what we're forecasting. I'd say over half of that relates to lower inbound transportation costs, as we've renegotiated those rates that come down really to pre-pandemic levels. And so there's a tremendous benefit that comes from that. We're forecasting improved margins in our retail business. That's a combination of continued progress with improving our realized pricing. We've had good results so far in doing that. We're assuming that we're going to continue to have progress on that front. Better margins forecasted in Canada, some improved margins in our wholesale business, which in part is due to an improving trend on product costs, also an improving trend on chargebacks from some of our larger customers. So a number of things contributing. The vast majority coming from those lower inbound freight costs.

Great. Thanks. And my second question, can we just double click on what to expect for the wholesale replenishment business in the second half? And how much of wholesale is typically a replenishment in the second half? And then how much of a hit did you take last year?

We got clobbered last year in the second half. That's when inflation peaked, consumer demand slowed down. In first half last year, our wholesale customers were building inventory, trying to get ahead of the port congestion and anticipating another good year, just like they had in 2021 with us, the anticipated 2022 would be another good year in the first half. But when inflation hit, it was probably late spring. If you recall, one of our largest customers announced that the consumer had slowed down. We were starting to see the same thing in the tail end of the second quarter. In the second half of last year, most of our wholesale customers were aggressively trying to get out of inventory. The order cancellations were significant for us. So we're planning wholesale down 7% this year, but only 2% lower in the second half. Replenishment now is planned down around 2% for the year, but it's planned up over 10% in the second half. Seasonal demand probably down around 10%. That's true in the first half, second and that seasonal product where they're saying, hey, we're just going to order much more conservatively. That's kind of been the general theme of our conversations with wholesale customers this year. We're going to approach 2022 conservatively seeing what we saw starting in the second half of last year. Keep in mind, that's when the inventory decisions had to be made by our wholesale customers largely starting in the second half last year when the consumer started to slow down. So replenishment – the nature of our replenishment business, that's the milk and eggs at the grocery store. These are the essential core products that families load up on, buying multiple quantities and then need to replenish those products frequently in those early months and years of life. So we're expecting meaningful – just based on what we're seeing in our business, we're expecting a meaningful improvement in our replenishment sales in the second half.

Thanks, guys. Good luck.

Thanks, Warren.

One moment for our next question. And our next question will come from Tom Nikic of Wedbush Securities. Your line is open.

Hi, everybody. Thanks for taking my question. It sounds like Carter's brand inventory is in a pretty good shape, both internally and externally. But I'm curious when you kind of look around the industry as a whole, what does inventory look like for private label brands, what does inventory look like for the mall-based competitors. And I'm just kind of curious what the broader environment looks like from your seat?

Generally speaking, with the larger, better retailers, they are running leaner on inventories. That's generally been the theme of our conversations with our largest customers. They're running leaner on inventories, trying to drive better sell-throughs, trying to strike the right balance between topline growth and achieving their margin objectives because when you run a leaner on inventories, you have better sell-throughs, you have less product on the clearance rack at the end of the season, you're seeing improved price realization, less discounting, fewer promotions. That's generally been the theme. That said, you asked about our specialty store competitors, it varies. We've been in some stores and they're loaded with product. Those who are more promotional bought more inventory than they're seeing in terms of consumer demand, and they ultimately have to move through it. So all I can speak to is the data we have is that we are running – inventories in our stores are down significantly from, say, the pre-pandemic period. We're probably carrying over 40,000 units in each of our stores on average. And today, it's probably closer to 25,000 units per door. So most of our inventory backrooms are light on inventory. And so we're trying to drive higher sell-throughs. Good retailers look for an 80% sell-through. Sell-through 80% at the desired margins and some portion of 20% goes on the clearance rack. Before the pandemic, we're probably taking about a third of what we were sourcing from Asia and putting it on the clearance rack. By comparison, this year, our sell-throughs will probably be better part of 80% and some portion 20% or less sold at clearance. So good retailers are focused on running leaner and inventory. We all saw the benefit during the pandemic when you couldn't get product in from Asia of running leaner on inventories. When we ran leaner, we saw less resistance to the higher prices and the fewer promotions. Consumers are looking for good product at good price, and that's been the experience that we've had kind of in this post-pandemic period. Better price realization, better margin. That's a much better model. It's a healthier model. Even though our wholesale customers have kind of right-sized and run lean around inventory, that's a healthier model for them. If it's a healthier model for them, it's a healthier model for us.

Got it. If I could add one more. I know in your prepared comments, you mentioned the wedding boom that happened in 2022. And I would imagine that there is some amount of lag time beyond just the normal nine months? Honeymoon babies happening out there, but have you looked into like what the average kind of lag time is between like a wedding and the first child birth and when does that give you any optimism for a 2024 recovery or I guess just trying to think how that plays together.

Yes. Again, there was a record number of weddings. I think it was like a 40-year high in weddings last year. And Baby, thankfully, 60% of our business is in baby apparel. And that continues to be the strongest part of our business. And even with the – we just talked about the replenishment, that is largely the nature of business, vast majority of our business with the largest retailers are heavily weighted to baby apparel. So that's why I think we've seen the success we've seen with exclusive brands. That's where we – our stores provide a superior experience for family shopping for baby apparel. Lag time, I can't say for sure. All I can tell you is that baby continues to be the strongest part of our business. It's the largest part of our business. And that's where the relationship starts. So our success over the years was we typically have the first purchase of a wardrobe that a family purchases for the child, long before that child arrives. It's typically the first thing you kind of have this vision. What's this beautiful child and were home from the hospital on their first day. So that's when the relationship starts. And we have the number one market share in newborn apparel, 5x this year of our nearest competitors. We have the number one market share in toddler. So our whole focus has been on extending the lifetime value of that relationship up to about a 10-year-old child. And before the pandemic, some of our fastest-growing segments, age segments in our business, we're the apparel for that older child. So lag time, not so sure, but we are encouraged by the number of weddings, record weddings. And we're encouraged by the birth rates, quite frankly, that we saw an elevated number of births in 2021. The experts, so to speak, the economists were way off their predictions in terms of how many children would be born, they expected as many as 500,000 fewer children will be born in 2021, and they were wrong. Thankfully, they were wrong. The number of births in the United States increased in 2021, and it stayed stable in 2022. So [first to moms] 29-year-old are actually up, first to moms 25 to 29 are down a bit and first of moms under 25 are down a bit. So anyway, it's stable. We're expecting stable, if not improving birth in the years ahead.

All right. Sounds good. Thanks very much and best of luck for the rest of the year.

Thank you, Tom.

One moment for our next question. And our next question will come from Ike Boruchow of Wells Fargo. Your line is open.

Hey, good morning, guys.

Good morning, Ike.

Two for me. Hey, Mike. First, maybe, Mike, for you, just when you think about how the business works in the back half of the year, how much risk does the current heat wave we're seeing in the country have to the seasonal transition you have planned? I mean when do you need – when do you install my baby screening in the background? When do you kind of need things to basically go back to normal? Is there a date where you kind of need to see that transition take place? Otherwise, it kind of messes up the flow of merchandise in the store. Just kind of curious how you think about that.

Ike, I missed the days we talked about weather. I missed those days. So yes, there's been a heat wave. We recently said, in years past before the pandemic before historic inflation, we'd be sweating out the weather. We don't – those things we don't worry about as much. The weather is never ideal. It's either too cold, too hot, too rainy, too dry so our business is good. Fall is off to a very good start. And I think it's largely based on the strength of the product offering, it's what we call transitional. Years ago, and this time of the year, we'd be shipping corduroys into the store and flannel shirts. And puffer dress, right? Today, we got beautiful shorts. Kids are going back to school, these days in shorts and t-shirts, so that's the product offering we have right now. Our comps in the second half are only down 7%. That's a 50% improvement over the first half. So we're actually encouraged by what we're seeing despite the fact it's brutally hot through many parts of the country. So we're doing okay. So weather – we're not thinking right now that weather is having any meaningful impact on our business. It maybe, but we're encouraged by the current trends in our business.

Okay. Great. That's helpful. And then just a bigger picture question. When you look at the guidance for wholesale, I think you're planning around $1 billion this year. About 20% below pre-pandemic. Maybe can you just walk us through this a bit. I'm kind of curious like what – so how do we think about those $200 million in lost revenue? Do you think those sales are they coming back? Is this kind of the new normal, this new run rate of the business? Is this the new normal? What exactly has happened to the exclusive business within wholesale in terms of penetration over the last couple of years? Just trying to understand how we should think about this current base business in the channel going forward?

Ike, I would say, overall, our wholesale business is strengthening. And as Mike shared with you, we beat our plans in the first half. We're only going to be down 2% in the second half. We do have an initial read on spring 2024, we have sold in the product for spring 2024. Summer bookings still to come. But based on what we have in hand for spring 2024, we plan to resume the growth in the first part of 2024. So we're excited about that. We got replenishment still about 30% to 40% of the business, so that's to come along with summer. But we feel good about that. You are correct about $1 billion business. Our operating margins are improving. I think we're up over last year in Q2 and by the end of the year, we'll have a – we believe, a very high teen operating margin and nearly back to 2019 levels of profitability. So the business is strengthening. It's healthy. It has migrated and it has changed a lot. You've got folks that are no longer in business with us. Consumers during the pandemic, they got comfortable rotating to, I would call it, the big three, Target, Walmart and Amazon, where we have really great relationships, strong exclusive branded business and I know a lot of our competitors would love to have businesses with all three of those we do, and that is about 51% of the business, we think it will be this year. And we think there's opportunity for growth there. We've got a good business with department stores, but it's lower than it was in the past. A, there's less of them, and B, they've had a little bit more traffic challenges. And then we got a business with the clubs and the promotional retailers as well. So it's a multi-pronged business. Our focus has been on profitability. We could certainly sell a heck of a lot more if we had lower prices and lower margins, but we've chosen not to do that. So we've worked on good strategic partnerships, healthy relationships. I think if things turn out the way we hope they will this year, we'll have about a $1 billion business with a very high teen operating margin, a good base to grow on going forward and optimism that we're going to have good growth going into 2024.

I guess my question is growing off of that back in normal run rates makes sense. But should we stop looking at like the $1.2 billion you had in 2019 as like as reasonable. Like have those – you mentioned department stores and buybuy BABY, should we just kind of like eliminate that from our memory and just think about normalized growth off of this billion?

Yes. I think you got to take into account the world has changed dramatically since 2019. So we are where we are, again, very healthy billion-dollar business, new base to grow off of with a lot of good initiatives we have as a company. And the retailers that we are partners with and that compete against each other are very different than they were pre-pandemic. And so we look at it as high teen operating margin, $1 billion business, good basis to grow and optimism going forward.

Great. Thank you.

And one moment for our next question. And our next question will be coming from Jay Sole of UBS. Your line is open.

Great. Thank you so much. Mike, you touched on the digital business a little bit in your opening remarks. Can you just elaborate a little bit? And maybe tell us, within the down 16% comp for Q2, what was your growth on e-commerce versus what was the growth in the stores? And then maybe secondly for Richard. Can you just walk us through the EBIT dollar guidance for the full-year total? Like what were the factors that changed from the – where it was before that $350 million to where it is now? Thank you so much.

We saw a better performance in the stores than e-commerce. I'd say the performance is about – we don't like to split it out the e-commerce from the stores, but the performance in the stores was far better than e-commerce. That said, the mix of e-commerce that we do this year will probably be around 33%. Last year, it was close to 37%. But in terms of the market, our e-commerce business is outperforming the market. For the market for kids apparel in the United States, e-commerce mix is closer to 20%, 28%. The credit card data that we've seen year-to-date would suggest e-commerce, what they call e-commerce pure-play apparel is down about 25%. We're better than that. Our performance in the first half has been better than that. I still say e-commerce is more impulsive purchase triggered by text, by e-mails. And with credit card debt being where it is, the delinquency rate is increasing most around 18 to 29 years old purchasers and that is some segment of our consumer base. So years for years, Jay, we'd be asked, where do you want the next incremental dollar of sales. You want it in the stores, because that's where the fixed cost is. We're encouraged that we're seeing very good performance. I think we're comping positive in our stores second half to date. So more people are coming into the stores. They want to get into the stores. They want that immediacy. They want the experience of the store. So I don't know if it's so much a Carter's factor as much as more people are shopping in stores, fewer people in shopping online than they were in years past.

And Jay, on the second part of your question, I would say the revisions to the EBIT guidance primarily just track to the lower – modest lower sales or risk adjustment that we made in our U.S. Retail business. So we're encouraged by this improvement in trend. We're still forecasting a nice inflection point over first half results in retail, perhaps not quite as dramatic of an improvement as what we had in our original guidance, which I think, given the environment, being just a bit more cautious on that front, but I think the revision to EBIT is largely based on the revision we made in our forward guidance on retail sales.

Got it. Super helpful. Thank you so much.

You're welcome.

Thank you. And I would now like to turn the call back to Mr. Casey for closing remarks.

Well, thank you all very much for joining us this morning. We look forward to updating you on our progress in October. Goodbye, everyone.