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We also plan to close at least 115 less productive stores by 2022, largely stand-alone Carter's and OshKosh stores, many in declining outlet centers. About one-third of those closures are planned to occur this year. Collectively, the stores scheduled to close had less than a 2% operating margin last year. Those stores ... |
As we close these stores, we are seeing about 20% of their sales transferred to our other stores located in an adjacent market.The profitability of those transferred sales flows through at a very high margin given the fixed cost structure of our store model. Our objective with these openings and closures is to improve ... |
Consumers have rated our Carter's stores as their favorite place to shop for 0-month to 24-month apparel. Over the past year, 83% of our customers shopped in our stores. In most cases, our relationship with consumers starts in our stores, and with our Age Up initiative, we plan to extend the length of those relationshi... |
Growth in our US eCommerce sales in the third quarter was less robust than we had seen in the first half. First half eCommerce comps were up in the mid-teens. By comparison, comps grew by less than half that rate in the third quarter. In years past, we've been fortunate to have strong international demand for our brand... |
Demand from domestic consumers in the quarter grew about 13%. Demand from international consumers was down about 10%. We saw the biggest declines in demand from Brazil, Argentina, and Russia, each of which saw a double-digit devaluation in their currencies relative to the US dollar in the third quarter. eCommerce sales... |
We are forecasting 4% to 5% growth in our Retail segment this year with comps up 2% to 3%. Our comp goal is 3% or better, and if current trends in our business continue, we believe that goal will be achieved. Going forward, we are expecting mid single-digit growth in our Retail segment. |
Our wholesale sales in this quarter were lower than last year largely due to the loss of Toys "R" Us and Bon-Ton, two historically good customers of ours. For the year, we're forecasting our wholesale sales down about 3%. What we lost in sales to Toys "R" Us and Bon-Ton, we are partially recapturing with other customer... |
As the largest supplier of young children's apparel to the largest retailers in the country, we have insight into how our brands are performing with every major retailer. Retailers who have a broader scope of baby-related product offerings including car seats, strollers, diapers and formula; are benefiting most from th... |
In our stores, we're seeing the best lift in sales at stores within a five mile radius of the closed Toys "R" Us stores. As more time passes, since the Toys "R" Us store closures this summer, we're seeing an improved trend in our store sales. |
With respect to replenishment trends, earlier this year, we launched our annual refresh of Little Baby Basics. That's the core essentials component of our Carter's baby product offering. To-date, replenishment trends exclusive of Toys "R" Us are better than last year but the growth is less than we planned. What we have... |
Store closures in our wholesale business have been disruptive to our growth plan this year. Longer term, we see these closures positively. Going forward, we will be serving fewer better and larger retailers who have the ability to invest in their businesses and our brands to provide a better experience for consumers. G... |
We expect international sales to grow by 5% this year and contribute about 13% of our total sales. In the third quarter, sales were lower than expected. Like our experience in the United States, unusually warm weather weighed on Canada's results. Cooler weather is now driving strong double-digit comps in the fourth qua... |
I was in Mexico earlier this month, the integration of that new business is going well. It has a first-class management team and it's a good multi-channel model. Its wholesale business is currently larger than its retail business. We'll be testing a new co-branded model in Mexico next year. We hope to replicate the suc... |
We are changing our business model in China. We had a disjointed effort managing the eCommerce business separately from the brick and mortar business. Carter's was directly managing the commerce business, our wholesale partner was managing the stores, and we were unintentionally competing against each other. |
China is a very attractive market for kids apparel, given four times the number of annual births relative to the United States. We are exploring a new model which envisions a China-based partner managing both the online and offline businesses under a licensing arrangement. Our objective is to build a stronger foundatio... |
Some of the risks we're assessing going forward are rising product cost and the exposure to new tariffs. As we shared with you on our last call, we are planning, low single-digit cost increases for Spring 2019. After several years of consistently lower product cost driven in part by the success of our direct sourcing s... |
Longer-term, we are assuming a more inflationary cycle with low single-digit increases in product cost and consumer prices. Just for context, every percentage point increase in our product costs add less than $0.04 to the unit price. So even with the related price increases, we believe, we will be offering significant ... |
Tariffs imposed earlier this year on imports from China are not expected to have a material impact on our 2018 or 2019 growth objectives. Our product categories were largely excluded from those tariffs. That said, this is a fluid situation and we'll continue to monitor the reports on trade negotiations. In recent years... |
In terms of guidance, in July, we were intentionally cautious forecasting growth in the third quarter. Consumer demand during seasonal transitions is difficult to forecast, and in our business, highly dependent on weather. Our forecast in July did not contemplate the unusually hot weather in the Northeast and other par... |
We have nine weeks to go this year. Given our experience in the third quarter, we have tempered our fourth quarter growth objectives, and believe there may be more upside than downside in our forecasts. Currently, demand for our fall and holiday product offerings is very good. We're currently outperforming our forecast... |
Carter's is the number one brand for baby apparel and sleepwear. We have five times the market share of our nearest competitors. Both product categories are purchased in higher quantities as weather turns cooler and during the year-end holidays. We are also seeing a strong response to our holiday playwear, including th... |
In summary, despite the challenges this past year, we are in the homestretch of what we expect will be a record year of sales and profitability, and our 30th consecutive year of sales growth. We've made significant investments in our business this year. We believe, we have strengthened our multi-channel, multi-brand bu... |
Over the next few months, we will refresh our growth plans based on our experiences this year. Based on our current estimates, we are planning, good growth in sales and earnings next year. |
Richard will now walk you through the presentation on our website. |
encourage you to review this information as you evaluate our results. |
Moving to page four with some highlights of the third quarter. Consolidated net sales declined 2.5% compared to last year. The principal driver of this decrease was lower sales in our wholesale segment offset by slight growth in our Retail and International segments. Discontinued sales to Toys "R" Us, Bon-Ton and Sears... |
Adjusted operating income declined 18%, reflecting lower sales and investment spending. Adjusted earnings per share declined 5% compared to last year to $1.61 with the benefits of a lower effective tax rate and lower share count, partially offsetting lower operating income. On our July call, we had guided to roughly co... |
Moving to our adjusted P&L for the third quarter on page five, beginning with adjusted gross margin. Adjusted gross margin was 42.2%, down 40 basis points compared to last year. This reflects customer mix changes within wholesale and higher freight and shipping costs in our eCommerce business, offset somewhat by sourci... |
We've not yet seen the full benefit of all of these investments, but believe, they will help drive our business in the quarters and years ahead to enable greater productivity and capabilities across the company. We have a good process to evaluate the efficiency of our spending and we will continue to critically evaluat... |
In the third quarter we've estimated that approximately $16 million of SG&A relates to the investments in the areas previously mentioned and as much as $50 million on a year-to-date basis. |
Third quarter net interest and other expense was $10 million compared to $7 million last year. Interest expense in the third quarter was about $2 million higher than last year due to higher borrowings and higher market interest rates versus a year ago. Our third quarter effective tax rate declined to 23.5% from 33.2% a... |
Page six summarizes our year-to-date adjusted results through the first three quarters of 2018. Net sales were comparable and adjusted EPS grew 1% over last year. |
Turning to page seven with a summary of our balance sheet and cash flow. We ended the quarter with strong liquidity with cash on hand and available borrowing capacity on our revolver, totaling approximately $470 million. With the benefit of the new US tax law, we were able to repatriate $65 million in overseas cash dur... |
Net inventories at the end of the third quarter were up 14% versus last year. As expected, inventories were higher for several reasons, including new growth initiatives across the business, the timing of inventory receipts and higher on-hand baby replenishment inventory. At present, we believe the overall quality of ou... |
We anticipate good sales growth in the fourth quarter and early next year and project year-end net inventory growth at the end of this year to moderate to approximately plus 8%. We've determined to carry higher inventory in a few specific areas of the business, notably certain programs within retail and in support of o... |
Historically, we've generated the majority of our annual operating and free cash flow in the fourth quarter of the year, and we expect, that will be the case this year as well. We're currently projecting that full-year operating cash flow will be in the range of $300 million to $325 million. Our outlook for capital exp... |
Now, turning to page nine with an overview of our business segment performance in the third quarter. Our consolidated adjusted operating margin was 11.6% compared to 13.8% in last year's third quarter. The drivers of this decrease were lower profitability in our US retail and wholesale businesses, which I'll cover in s... |
Moving to third quarter results for US retail on page 11. Total US retail segment sales in the third quarter increased 1% versus last year. Our total retail comp was up 0.5%. As Mike mentioned, results in US retail were lower than we had forecasted, which we've attributed to several factors. First, our performance arou... |
eCommerce sales were lower than we had anticipated. In addition to the Labor Day and promotional factors which I've mentioned, we believe the stronger US dollar negatively affected traffic and sales from international consumers shopping on our US website. We've seen this phenomenon in the past when the US dollar streng... |
After the Labor Day holiday period and with the arrival of cooler weather, US retail sales trends improved meaningfully with comps up in the double digits over the last three weeks of September. Q4 is off to a good start as October month-to-date comps are up in the double digits. As Mike said, we continue to make progr... |
US Retail segment margin was 10.3% compared to 12.8% in the third quarter of 2017. This performance reflects higher eCommerce shipping and fulfillment expenses, and higher spending on marketing and technology investments. We're expecting retail comps in the fourth quarter will be up about 4% driven by a number of initi... |
On pages 12 through 14, we've included some of our holiday marketing; on pages 12 and 13, we highlight some of our special holiday outfitting items in this year's assortment. On page 14, consumers have told us for years, they'd love to be able to join their children in wearing our iconic Christmas pajamas. This year, w... |
On page 15, we have our latest Carter's Instagram posts. In the third quarter, Carter's once again captured the greatest social media engagement among our peers on Instagram by securing all of the top 25 engagement scores. |
Turning to page 16 with results for our wholesale business in the third quarter. Sales in US wholesale were down about 8% versus a year ago. We had planned third quarter wholesales down year-over-year. This decline was largely driven by discontinued shipments to Toys "R" Us and Bon-Ton, calendar differences between us ... |
Relative to our previous forecast replenishment demand in Q3 was somewhat lower than we had planned. We saw good growth in replenishment demand across wholesale, just not quite at the level we had planned. Replenishment demand has been particularly strong for our exclusive brands. |
We're expecting strong net sales growth in US wholesale in the fourth quarter, up in the mid-single-digits over 2017. Segment operating profit was $68 million compared to $79 million last year. Segment margin was 20% versus 21.3% a year ago. This margin performance reflects changes in customer mix, higher spending on m... |
For the full year, in 2018, despite the negative impact of the discontinued sales and some higher provisions for uncollectible accounts, we're forecasting the operating margin for US wholesale to be approximately 20%. We believe, we will recapture about half of the $80 million of sales to Toys "R" Us and Bon-Ton, we ha... |
Now moving to our US retail business, selling in the wholesale channel so far in the fourth quarter has been very strong. Page 17 features a photo of a new baby shop at a Kohl's store in the Atlanta area. We've partnered with Kohl's to support the recent roll out of 150 new Carter's baby shops. Locations were selected ... |
We believe, delivering a high quality brand presentation wherever mom shops is a point of differentiation for us. In these baby shops, we updated pictures optimized for space and capacity, while providing a modern fresh look with our great Carter's photography. Early returns on these investments are encouraging. |
Page 18 features our Child of Mine brand, which is available exclusively at Walmart. Walmart recently strengthened the in-store presentation of the Child of Mine brand, which can be found in virtually all of Walmart's 4,000 store locations in the United States. We believe Walmart is seeing strong returns on these inves... |
On page 19, we have some imagery from target.com featuring the Just One You brand, which we created especially for Target, like many of our wholesale customers, eCommerce is an area of investment and emphasis for Target. We think this online presentation does a great job conveying the style and value of the Just One Yo... |
On page 20, Simple Joys continues to be an important growth initiative for us. This brand was introduced on Amazon last year and has been growing rapidly. We recently introduced Simple Joys toddler product, which complements our initial launch which was focused on baby and sleepwear. Simple Joys growth continues to ram... |
On page 21, we've included photos of two notable wholesale points of distribution for our Skip Hop brand. First, Amazon recently opened its first four star concept in New York City. As the name implies, the store features items that customers have rated, on average, four stars and above. Included in the launch of the s... |
Second, we've expanded Skip Hop's presence at Macy's by introducing a new fixture in 45 locations and adding a second fixture in nearly 70 existing locations. This expanded presence builds on the brand's successful introduction in Macy's in 2017. |
Moving to page 22, and international segment results for the third quarter. International segment net sales grew 1% in the third quarter, reflecting the contribution from our 2017 Mexico acquisition and increased demand in various markets outside of North America. This growth was mostly offset by lower demand in China ... |
On a constant currency basis, third quarter international segment net sales grew 4%. Through the first three quarters of 2018, our International segment has achieved growth of 6% over last year. Canada, the largest component of our international business grew net sales 3% on a local currency basis with retail comps of ... |
International segment adjusted operating income was $16 million compared to $17 million in the third quarter of last year, segment operating margin was 12.7% compared to 13.5% last year. This margin performance reflects lower profitability in China and Canada, partially offset by improved contributions from other inter... |
Looking ahead, we're planning good growth in our international segment in 2019. In addition to growth in Canada and Mexico, we expect to benefit from the addition of several new wholesale partners in markets such as India, United Kingdom, Russia, Greece and Ukraine to name a few. |
Pages 23 and 24 showcase some of the newest stores operated by our international partners. These 25 or so partners operate stores in over 80 markets worldwide. Page 23 features a Carter's store at the Mall of the Emirates in Dubai. This new upsized location strengthens what has historically been one of the most product... |
Page 24 is a photo of a new co-branded store in Perth, Australia. This is our partner's first store on the West Coast of Australia, and this store is after a very strong start. |
Moving to our outlook for the fourth quarter on page 26. We're expecting a good fourth quarter with growth in all of our business segments. We've moderated our expectations somewhat relative to our previous forecast, principally to reflect a more cautious outlook on retail comps and wholesale replenishment demand. We'r... |
For the fourth quarter, we expect consolidated net sales to increase approximately 5% and adjusted earnings per share to increase approximately 10%. We expect year-over-year growth in SG&A will be lower in the fourth quarter than year-to-date, and we're planning SG&A leverage for the fourth quarter as well. If we're su... |
With these remarks, we're ready to take your questions. |
Thank you, sir. (Operator Instructions) Our first question comes from Kate McShane from Citi. |
Hi. Thank you. Good morning. Thanks for taking my question. |
I was wondering, if we could walk through the Toys "R" Us recapture again. Originally, you had told that us you achieved $20 million out of the $40 million when you last spoke to us in July. Can you update us on what you think you captured during the third quarter? |
And then, just still on the same subject, could you maybe walk us through what the environment has been like post Toys "R" Us, and when you start to see sales improve, was there a pull forward of demand from the liquidation that's causing some of the overhang. And does your 2019 outlook include any additional recapture... |
So your recollection is correct. We were about $20 million of the $80 million we -- just to put in context, we lost probably about $80 million of balance of year shipments that we had planned to make after we heard that Toys "R" Us and Bon-Ton plan to close all of their stores. |
So through July -- and we assumed we recaptured about half of that, about $40 million of the $80 million. And through July, we probably had felt as though we had at least a line of sight on $20 million of additional demand largely from wholesale. The mix was going to be largely driven by additional wholesale demand. So... |
So the analysis I've seen would suggest that, we well recover more than $40 million. We had hoped that would be a bigger number, but at least what we had shared in our forecast with you was that we felt as though we had a high confidence level that we would recapture $40 million of the $80 million that we had planned t... |
And then in terms of the business, I would say, we are very disappointed in the Labor Day performance. Labor Day for us is an important holiday. It's probably second only (ph) to the Black Friday holiday, and so we were very disappointed in the performance. I should share with you, the comps during our Labor Day promot... |
In the weeks that followed Labor Day, our comps were up around 13%. So we saw the consumer starting to embrace the fall and holiday collections much more so than they did over the Labor Day holiday. And in October, performance has been outstanding. And this is what we've seen in our business over the years. When the we... |
Okay, great. And if I could just ask one more follow up question about your Labor Day comment. In the prepared remarks, I think you had mentioned that you pivoted the marketing message a little bit. I am just wondering why do you think -- what do you think it was up in messaging that wasn't really conveying your value ... |
Well. That we can say always competitive. I think in retrospect, I think our marketing message was too heavily weighted to the promotion, and not to the strength of the product offering. So those are some of the changes that we made after what we saw over Labor Day, and the consumer responded to it. |
Thank you. Our next question comes from Ike Boruchow with Wells Fargo. |
Hey. Good morning, everyone. Two questions. I guess, maybe Richard, the first question is, just looking at the Q4 outlook you have now relative to couple of months ago. You know, kind of understanding the sales are a little bit below. But given you're expecting some SG&A leverage, it seems like the gross margin pressur... |
Could you maybe walk us through your thoughts on gross margin for Q4 and then kind of tying that to the inventory ending Q3, are you a little bit heavy and you're implying some more promotion and markdown that's going to be needed relative to your last outlook? Just kind of curious on holiday margin. |
Okay. Sure. Well, I think there are a few points of pressure year-over-year as it relates to gross margin. They're largely the trends that we've seen today in the business, more than anything. So in wholesale, you have the change in customer mix, the loss of the TRU and Bon-Ton volume, which was very high margin for us... |
Within retail, there probably is some minor effect of some inventory clearance. Although we've made very good progress with that. And by the time we got to the end of the quarter. We had moved through quite a number of units. That's probably less of an issue. One issue that we have faced in the gross margin structure w... |
I'd say, the upsides to margin year-over-year, we're expecting better margins in Canada. We're seeing a nice lift in margins in Skip Hop and we're driving some other efficiencies in our supply chain, all of which are coming through -- coming through the gross margin line. |
And Richard, can you say with more detail on what your expectations are for Q4 on the gross margin line? |
Well. I would say, we'll continue to enjoy that nice serial left that we got going from Q3 to Q4 where we have a higher proportion of retail sales relative to the third quarter. I do expect some modest pressure year-over-year in the margin rate. |
Got it. And then just last question, you know, you've given us some breadcrumbs to next year on the top line on US wholesale, low single digits and good growth international and your comps are obviously better quarter-to-date. I guess, I'm just curious -- the margins, there's different things that are kind of taking pl... |
I guess just thinking about the algorithm of the business into next year, you guys -- how do you balance growth or I guess, said differently, are you able to view the business as having the same type of growth that it had in prior years? |
We (ph) know more. We have a lot of work to do between now and the balance of the year. We are developing our revised long-term plans through 2023, and we'll review that -- those assumptions with our Board in the balance of the year and early next year. We'll have more to share with you in February. But our plan is con... |
We're disappointed, we'll come out this year in terms of our operating margin. We felt as though we would have done better. But to Richard's point, we lost a very high margin customer in Toys "R" Us this past year and we took a step back on our retail business in the third quarter. Those are probably two big misses rel... |
But our plan going forward is that, we'll have good top line growth and well have a good margin expansion going forward. So we'll have more to share with you. It's premature to be more specific today on the growth plan for 2019 through 2023. |
Thank you. Our next question comes from Susan Anderson with B. Riley FBR. |
Hi. Good morning. Thanks for taking my question. I guess, I wanted to ask about the miss in third quarter. I guess, how much do you think was weather-related versus maybe some other factors such as pull-forward of demand from Toys "R" Us? |
And then just a follow-up on Ike's question on the fourth quarter guide. I guess, I'm trying to figure out what has changed from your original expectation for fourth quarter, because it seems like maybe top line is a little bit better. So on the margin front, that has come down a bit. But it seems like the loss of this... |
Let's say, as it relates to fourth quarter, our implied guidance for fourth quarter top line would have been growth closer to 6% or 7%. We've moderated that to be the roughly 5% that we talked about today. And I think there is a healthy dose of just being cautious with that. We've seen the shortfall from Labor Day, whi... |
On the margin front, I don't know if there's a dramatic change in our outlook there. I think, most of the change in profit outlook attracts to lower top line where we're taking most of that out of the retail business, which is good margin business for us. I think, we are cautious on the factors I mentioned related to s... |
Your question, how much weather played a role in the third quarter, Labor Day, it did. We happen to be in New York the days after Labor Day, it was unusually high. And keep in mind, Labor Day weekend, we're selling blanket sleepers, we're more fall-forward (ph). So it's understandable that weather would have had an imp... |
Other things that worked against us is the eCommerce demand, it was not what we had expected in the third quarter. It was less than half the rate of growth that we've seen in the first half, and it was lower international demand. We had good growth in domestic demand, good double-digit growth in domestic demand, but in... |
And I'd say, we've referenced the replenishment trends in our core Carter's Little Baby Basics. The replenishment trends are up, year-over-year they are up excluding the impact of Toys "R" Us. With the other customers, we've seen good replenishment trends just not as good as we had hoped for. And then further -- a way ... |
So there's no question. There was a pull forward of demand with those Toys "R" Us store closures, people were loading up basketfuls of product. And so, that product is -- children are outgrowing their product, we're starting to see better trends in our sales. |
Great. That's helpful. And then just one follow-up. Maybe if you could talk about. If you see sales pressure both across baby and then young kids, I think you talked about the size-up initiative doing pretty well. But maybe there's a little bit heavy inventory in the baby category. And with that, I guess, do you feel l... |
Yeah, Susan. Just a follow-up on your question. A Couple things. We continue to have good baby business. I think, the shift we are studying very closely where it seems to be overweighing to our exclusive brands. As Mike said, when folks are shopping more, the Target, The Walmart and Amazon did well. So our business is ... |
So we continue to focus on that business and make sure, we doubled on our efforts on our direct channel and with our wholesale customers to continue to drive growth in the core of our company. I think we showed you know, the Kohl's presentation we've had, we've invested in digital marketing with many customers and we c... |
In terms of Age Up, we feel good about that initiative. In July, we launched that Carter's Kid Line as a way to extend their relationship with the customer. It was kind of a second phase of the, "With You From The Start" campaign. And both the product launch and the marketing was well-received by our customers. In Q3, ... |
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