Carter’s, Inc. (NYSE:CRI) Q1 2024 Earnings Conference Call April 26, 2024 8:30 AM ET
Company Participants
Michael Casey – Chairman, Chief Executive Officer & President
Richard Westenberger – Senior Executive Vice President, Chief Financial Officer & Chief Operating Officer
Kendra Krugman – Senior Executive Vice President, Chief Creative & Growth Officer
Sean McHugh – Vice President & Treasurer
Conference Call Participants
Warren Cheng – Evercore ISI
Jay Sole – UBS
Ike Boruchow – Wells Fargo
Tom Nikic – Wedbush Securities
Paul Lejuez – Citi
Operator
Welcome to the Carter’s First Quarter Fiscal 2024 Earnings Conference Call. On the call are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Chief Financial Officer and Chief Operator Officer; Kendra Krugman, Chief Creative and Growth Officer and — I’m sorry, Sean McHugh, Treasurer. Please note that today’s call is being recorded.
I’ll now turn the call over to Mr. McHugh.
Sean McHugh
Thank you. Good morning, everyone. We issued our first quarter 2024 earnings release earlier today. The release and presentation materials for today’s call are available on the Investor Relations section of our company website at ir.carters.com.
Before we begin, let me remind you that statements about items such as the company’s outlook are forward-looking statements. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please see our most recent SEC filings and the earnings release and presentation materials posted on our website.
In these materials, you will find reconciliations of various non-GAAP financial measurements referenced during this call. After today’s prepared remarks, we will take questions as time allows.
I will now turn the call over to Mike.
Michael Casey
Thank you, Sean. 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 our sales and earnings objectives in the first quarter. Our U.S. retail sales were in line with our forecast with store sales down 1% to last year and e-commerce sales down 13% due to lower traffic.
Our U.S. wholesale sales were better than planned. We had earlier and higher than planned demand for our seasonal product offerings as our wholesale customers prepared for the warmer weather ahead. Our international sales were in line with our forecast with strong demand in Mexico and Brazil offsetting lower sales in Canada. We saw an expansion of our gross profit margin in the first quarter, which reflects the benefits of lower product costs and lower inbound freight costs.
Spending was lower than planned. With consumers more cautious on discretionary spending, we also curtailed spending where possible. We continue to run leaner on inventories. Inventories were much lower at the end of the quarter, and the quality of our inventories is higher. With less excess inventory, we saw a significant reduction in low margin off-price sales.
Given our progress reducing inventories, our average cash balances were higher in the first quarter. Seasonal borrowings were lower and our net interest expense was also lower. We ended the quarter with over $1 billion in liquidity, which enabled the continued return of capital to our shareholders, including a 7% increase in our quarterly dividend earlier this year.
In terms of our sales trends, we saw sequential improvement year-over-year in each month of the quarter. Easter came a week earlier this year and in early Easter has historically been a stimulus to sales for us as consumers switch over to warmer weather outfits and prepare for spring break vacations. With cooler weather patterns this year, our spring selling in key markets was lower than expected.
Our best performance over the Easter holiday shopping period was in Mexico, same product offering, different climate. Where weather is warming in the United States and Canada, sales trends are improving. Our growth in the second quarter will be affected by the shift in the Easter holiday and lingering cool weather in key markets.
We have visibility to our sales at the largest retailers of young children’s apparel in the United States, which suggests that cooler weather in the early weeks of April also weighed on other retailers. We saw a similar trend last year when sales in the second quarter started off slow, sales improved later in the quarter and continued to improve into the summer months. In this inflationary cycle, we believe consumers are shopping for apparel closer to need, making do with what’s in the closet until the seasons change.
Year-to-date, our comparable U.S. retail sales are down less than 10%, a few points lower than the first quarter due to a slow start to warmer weather apparel sales. We believe families with young children continue to be adversely affected by the higher cost of living. In the first quarter, we saw a noteworthy increase in the use of credit cards and a decrease in debit cards. Current market conditions are not as good as we envisioned earlier this year.
In February, inflation was moderating. Real wages were rising. Gas prices were trending lower, and there was a possibility of one, two or three interest rate reductions this year. By comparison, U.S. inflation in March rose more than expected, gas prices and mortgage rates have trended higher since February. Food prices are still elevated, and the likelihood of rate reductions this year is less certain.
We believe the higher cost of living and economic uncertainty are weighing on birth trends. It is estimated that 3.6 million children were born last year in the United States annual births down 2% last year. That’s the lowest number of births, since 1979. We saw this headwind in 2008 with the great recession, and we’re seeing it now. We overcame that challenge years ago and believe we’re well positioned today to work our way through the current market challenges. The children’s apparel market in the United States is estimated to be $28 billion. Our share of that market over the past 12 months has held steady at 10%. We have a much higher share of the younger age segments.
With respect to our product offerings, Baby apparel contributed over 60% of our first quarter apparel sales and continued to be our best-performing age segment. The trend in our seasonal product offerings, including shorts, swimwear and dresses picked up in March, where weather turned warmer. We saw the best-selling in our opening price product offerings. We also saw a strong demand for our premium-priced product offerings, including Little Planet, PurelySoft and special occasion collections in all size ranges. These elevated products complement the more essential components of our product offerings.
In late March, our early summer product offerings began to arrive early selling on our Memorial Day and 4th of July product offerings has been robust and maybe a bellwether of better sales trends ahead. With more than 70% of our sales and nearly 80% of our earnings forecasted in the balance of the year, we believe it’s too early to assume the slower sales trend in recent weeks is indicative of our potential for growth this year.
Our comments this morning assume sales trends improve in the balance of the year. We expect that improvement will be driven by the success of our growth strategies and stability in the macro environment. On prior earnings calls, I would speak to the high-end potential of our annual guidance. This morning, I thought it might be helpful to also share our assumptions supporting our risk-adjusted annual forecast.
Our priority this year is to demonstrate our ability to return to growth in comparable U.S. retail sales. In the balance of the year, we are forecasting a gradual improvement in the trend of our retail sales with a low single-digit growth beginning in the second half. For the year, we’re forecasting at the low end of our guidance that our total retail sales may be slightly lower than last year with low single-digit growth in store sales and a mid-single digit decrease in e-commerce sales.
More consumers are returning to our stores. We’re encouraged by the mid-single digit increase in store unit volume in the first quarter. Our stores provide the very best experience with our brands and same-day fulfillment of demand as consumers shop closer to need. Our e-commerce sales outperformed the market with 32% penetration to our total retail sales. In this inflationary cycle, we’ve seen lower traffic to our websites. Those who did shop with us liked what they saw, conversion rates and units per transaction were higher than last year in both our stores and online.
The drivers of the expected improvement in our U.S. retail sales in the balance of the year include a better mix and level of inventories, sharper price points on key items, a better mix of stores and improved marketing capabilities. Kendra will share our thoughts on each of these strategies with you this morning.
With respect to our U.S. wholesale business, were we are projecting low-single digit growth in sales this year, a bit better growth than we envisioned in February. Our growth this year is expected to be driven by our exclusive brand and club retailers. We’re also forecasting growth with our OshKosh, Skip Hop and Little Planet brands in wholesale this year. We’re forecasting lower sales to department stores and off-price retailers. We continue to benefit from the shift in traffic to mass channel retailers that accelerated during the pandemic and has continued in this inflationary cycle.
Target and Walmart have especially benefited from consumers preferring one-stop shopping for groceries, diapers, formula and children’s apparel. Those are the essential products purchased by families with young children on a frequent basis. Our exclusive brands sold at Target, Walmart, and Amazon are projected to be 54% of our annual wholesale sales this year, a few points higher than last year.
In all four quarters last year, we saw the benefit of earlier-than-planned wholesale demand. Our wholesale customers continue to forecast demand conservatively and if sell-throughs are better than expected, they prefer to move up orders to support that higher demand. It’s a healthier model for our wholesale customers and for Carter’s. With better sell-throughs, there’s less clearance product on the shelves at the end of the season, which enables better price realization and margins.
With better sales and margins for — with better sales and margins, our wholesale customers are more likely to build on that performance with us in the years ahead. Canada, Mexico, and Brazil are expected to contribute over 85% of our international sales this year. We have the largest share of the young children’s apparel markets in Canada and Mexico and we believe we have the largest share of the Baby apparel market in Brazil.
Collectively, those markets are estimated to be about $8 billion with total annual births, nearly 40% higher than the United States. With respect to our International segment, we’re forecasting our annual sales comparable to last year, consistent with our forecast earlier this year. We’re projecting double-digit growth in Mexico, driven by the success of our larger co-branded stores and good demand from our wholesale customers.
We’re also forecasting double-digit growth in sales in Brazil through our wholesale partner, Riachuelo, one of that country’s largest retailers. They’ve been a terrific partner and doing a beautiful job building our Carter’s brand in that $3 billion market.
We’re projecting slightly lower sales in Canada this year due in part to the slow start to spring selling and inflationary pressures weighing on families with young children. We’re also forecasting lower growth in the Middle East this year. Our supply chain continues to be a source of strength in our business working collaboratively with our merchants, designers and suppliers, our supply chain team negotiated a mid-single digit decrease in product costs this year, inclusive of lower ocean freight rates.
We plan to use a portion of that cost reduction to sharpen price points on about 15% of our product offerings. We’re planning a low-single digit decrease in our average price this year. Since our last call, our supply chain team negotiated new ocean freight rates, which go into effect next week. Those new rates will be up about 2%. We will incur higher costs this year related to the rerouting of products away from the Red Sea and around South Africa.
Prior to the war in the Middle East, we were directing 70% of our products to the East Coast and the balance to California. To mitigate the impact of longer transit times and related costs due to rerouting, we shifted the mix of inbound receipts to 50% through each of the East and West Coast ports of entry. On-time receipts are excellent. We have no — we expect no meaningful delays in the flow of our products from Asia in the balance of the year.
In summary, our first quarter was better than planned with earlier and higher demand from our U.S. wholesale customers. The trend in our U.S. retail sales improved relative to the fourth quarter last year, but slowed with the late arrival of warmer weather in key markets this spring. We believe the strength of our product offerings, sharper price points, fleet optimization strategies and new marketing capabilities support the gradual improvement in our U.S. retail sales this year.
Inflation and global turmoil continue to weigh on families with young children and their demand for our brands. With time, we expect inflation will moderate to desired levels. Consumer confidence will recover and market conditions will improve. Until then, we plan to forecast demand conservatively, stay lean on inventory commitments, fully invest in our growth strategies and reduced discretionary spending where possible.
Through the market turmoil in recent years, we demonstrated our ability to improve price realization, operating margins and cash flow. We have built a best-in-class resilient, multi-channel model in young children’s apparel, including unparalleled market distribution capabilities through the largest retailers of young children’s apparel and direct-to-consumer as the largest and most profitable specialty retailer focused on young children’s apparel. We believe we are well positioned to outperform the children’s apparel market and return to growth this year.
I want to thank all of our employees for a stronger-than-planned start to the new year and for their commitment to strengthen our performance in the balance of the year.
At this time, Richard will walk us through the presentation on our website.
Richard Westenberger
Thank you, Mike. Good morning, everyone. On Page 5, we’ve included our GAAP basis income statement for the first quarter for your reference. On Page 6 and non-GAAP adjustments. Last year’s first quarter results included a $1.2 million pretax charge for organizational restructuring. There were no non-GAAP adjustments to this year’s first quarter results. My comments this morning will include references to results, which are presented on an adjusted basis.
Turning to Page 7. As Mike noted, we exceeded our first quarter sales and earnings objectives, which we provided on our fourth quarter earnings call in February, higher and earlier than planned demand in our U.S. wholesale business drove the upside in our revenue performance. Our U.S. retail business posted a sequential improvement in quarterly comparable sales, which were in line with our forecast. Gross margin spending and interest income were all better than planned, which contributed to the upside in profitability we realized in the quarter.
On Page 8, we have some overall highlights of our performance in the first quarter. We posted net sales of just over $660 million compared to $696 million last year. Sales were lower in each of our business segments. In U.S. retail, the decline was driven mainly by the e-commerce portion of the business. We had planned U.S. Wholesale segment sales down in the first quarter due to changes in the timing of shipments year-over-year, lower bookings in the Carter’s brand and lower off-price channel sales given our clean inventory position.
We previously estimated that the differences in timing of shipments might negatively affect wholesale sales as much as $36 million in the first quarter and the actual impact turned out to be much less. Sales in our International segment were down slightly versus last year. On profitability, adjusted operating income reflected strong gross margin performance, offset by higher spending, including for new stores. We delivered EPS growth in the quarter due to lower borrowing costs, higher interest income, and a lower average share count versus last year.
Our first quarter adjusted P&L is on Page 9. As mentioned, sales in the quarter were down 5% from last year. Despite lower sales, gross profit grew by $6 million or 2% driven by a 310 basis point expansion in gross margin principally due to lower ocean freight rates and lower product costs. These benefits were offset a bit by lower margins in our U.S. Retail segment, given our reinvestment of a portion of lower product costs into targeted price reductions.
SG&A increased by $7 million or 3% reflecting investments in new stores and higher store payroll expenses that were partly offset by lower volume-related expenses. Our first quarter adjusted operating income was $55 million compared to $58 million last year. Adjusted operating margin was consistent with last year at 8.3%. Below the line, interest and other expenses declined by $4 million, reflecting higher interest income given our strong cash position and lower borrowings. Our effective tax rate was 23.9%, down 60 basis points versus last year, principally due to a higher forecasted mix of U.S. based income this year.
For the full-year, we’re anticipating an effective tax rate of approximately 23.5%. Our weighted average share count declined 3% as a result of our share repurchase activity over the past year. So in summary, first quarter adjusted earnings per share were $1.04, up 6% compared to a year ago on sales, which were 5% lower than last year.
Moving to Page 11 in our business segment performance. As I mentioned, our first quarter adjusted operating margin was 8.3%, which was comparable to last year. The strong improvement in profitability in our U.S. wholesale business offset lower profits in our U.S. Retail and International segments. I’ll provide a little more perspective on first quarter results for each of our segments on the following page.
Net sales in our U.S. Retail segment declined 5%. Comparable sales declined 7% with stores outperforming e-commerce. This comp performance was an improvement in trend from the down a 11% comp we posted in the fourth quarter. Our principal challenge in the first quarter continued to be traffic, particularly in e-commerce. We believe inflation continues to negatively impact demand from families with young children, given persistent high prices in important spending categories, including food and gas.
Also, while the earlier Easter benefited the month of March, it’s generally been a cooler spring around the country, and this weather has unfavorably affected demand for warmer weather outfitting. As Mike said, conversion and units per transaction in both stores and online were higher versus last year. In stores, we saw unit growth of 5%, our best performance in some time.
U.S. Retail segment margin was 4.6% compared to 8.1% last year. Realized pricing was down about 4% as we reinvested a portion of the benefit of lower product costs into sharper pricing on key everyday value items in our assortment for the balance of the year. In U.S. Retail, we’re planning pricing to be comparable to up slightly with planned margin expansion to be driven by lower product costs. Also contributing to a lower operating margin in U.S. Retail was expense deleverage on lower sales and a slight increase of sales mix towards lower priced clearance product.
Despite sales, which were lower year-over-year, U.S. wholesale had a very good quarter relative to our forecast. Recall that in the fourth quarter of last year, we saw higher demand for new spring product. These sales benefited the fourth quarter, but negatively affected our outlook for demand in the first quarter. Continuing the trend we’ve seen for several quarters, we saw earlier and higher than planned demand for seasonal products. Our supply chain has done a good job working through the disruptions in the Red Sea, which put us in a position to support this higher demand from some of our larger wholesale customers.
Sales to the off-price channel declined about $10 million or over 80% versus last year, which reflects our significantly improved inventory position. U.S. wholesale profitability improved significantly in the first quarter. Segment operating margin expanded 550 basis points to 24%. This improvement was driven by lower product and transportation costs, partially offset by selective price investments.
In our International business, first quarter sales declined 3% on a reported basis and 5% on a constant currency basis. We saw a strong growth in Mexico, where the business posted positive store comps in addition to the contribution from new stores. Sales in Canada were lower in the quarter, reflecting in part the same cooler spring weather, which negatively affected our retail business in the U.S. This included winter storms in Canada in the latter half of March, including during the Easter shopping period. Despite these pressures, our stores in Canada achieved a positive comp for the first quarter.
International sales also reflected planned declines in sales to our wholesale partners in the Middle East due to the ongoing conflict in that part of the world. In the quarter, we continued to see strong demand from our partner in Brazil, which represents our largest international market outside of North America. International segment profitability declined 90 basis points to 2.4% as a result of spending deleverage that was partially offset by lower product and transportation costs.
On Page 13, we’ve depicted the significant impact weather had on our U.S. retail results in the month of March, which is a high volume month in our business. March store sales represent almost half of our first quarter store sales and approximately a third of our total retail sales in the quarter. In general, where the weather was warmer than last year in March, our store comps were better. As shown in this graphic, the northern half of the U.S. experienced materially warmer weather in March and the first three weeks of the month, with temperatures 10 to 15 degrees warmer than last year. The southern part of the country did not experience these warmer year-over-year temperatures.
Accordingly, we generally saw positive store comps in the north and negative store comps in the South, which netted out to an overall flat store comp in March. As we mentioned in the past, a handful of states drive a disproportionate share of our retail store revenue including New York and New Jersey, Florida, Texas and California. So some of our largest markets, which experienced cooler weather this past March were a drag on first quarter comp sales performance.
Now to Page 14 with some highlights of our balance sheet and cash flow. Our balance sheet is in great shape. We ended the quarter with over $1 billion of liquidity, lower inventory and lower borrowings. Inventories declined by 23% versus a year ago, reflecting our success in profitably selling through pack and hold inventory, lower excess inventory levels, a reduction in the number of days of supply on hand and lower product costs. First quarter operating cash flow was a use of cash of $26 million. Change versus last year reflects the larger reduction in inventories we realized last year as we sold through pack and hold inventory.
We’re expecting another good year for cash flow in 2024, projecting full-year operating cash flow in excess of $250 million. Our strong cash position and forward outlook enabled us to continue the return of excess capital to our shareholders. In the first quarter, we raised our quarterly dividend by 7% to $0.80 per share, representing a distribution to our shareholders of nearly $30 million when including $9 million in share repurchases, our total return of capital was $38 million in the first quarter.
And now I’ll turn the call over to Kendra for an update on our progress with our growth strategies.
Kendra Krugman
Thank you, Richard. We are proud to be the top apparel brand in North America for children ages 0 to 10. To grow our share of this market, our company is focused on five strategic priorities outlined on Page 16. Our top priority overarching everything that we do is our commitment to delivering market-leading style and value across our brand portfolio.
Second, great products requires equally inspired consumer facing brand marketing. We are focused on driving world-class marketing and creating exceptional experiences in all of our channels. These efforts will help us execute our growth objectives through a strengthened U.S. Retail business, growth in U.S. wholesale with retailer specific tailored strategies and an expanded global footprint.
Turning to Page 17. Our brands continue to deliver relevant and wearable style at an incredible value. We saw strong spring product selling early in the quarter and more recently with warmer weather moving in. The good performance was driven by our Baby and Sleepwear business across brands, our most seasonal categories like shorts, Tank top and swimwear had a slower start.
As Mike mentioned, our customers are also responding well to both ends of the price spectrum, including our entry price, highest value everyday product and our more premium, higher-priced fashion assortment. In February, we launched our new Everyday Value program highlighted on Page 18. This ensures that parents who are increasingly feeling inflationary pressure can find the most essential stock-up items at competitive and consistent prices.
Our Everyday Value categories have had a positive impact on sales since launch, and we have realized an increase in positive consumer sentiment around value and price clarity. At the other end of the spectrum, we are having success with our most special entire price brands in collections. Page 19 features our fastest-growing brand, Little Planet, loved for its distinct and elevated aesthetic and for sustainability. Little Planet sales are trending up over 40% year-to-date. In response to strong consumer demand, this spring, we expanded our Little Planet retail store presence to include 13 shop-in-shops.
The response has been excellent, and we are now accelerating the expansion of our retail store exclusive Little Planet shop throughout North America this fall. Our PurelySoft collection is another example of how we are delivering style and relevant through a more premium product offering. Highlighted on Page 20, our PurelySoft collection continued to outpace our expectations. Customers love the super soft and stretchy fabric and are delighted with the incredibly competitive prices.
We are rapidly expanding the PurelySoft assortment, chasing additional inventory and increasing our distribution across channels to capture the strong demand. Importantly, Little Planet and PurelySoft, representing about $100 million of combined sales this year are both attracting a higher rate of new customers to our family of brands. These customers are more affluent, less price sensitive, spend more per visit and shop with us more frequently. Our licensed character assortment has been another area of growth.
On Page 21, we showcased an exciting new collaboration between two timeless brands, Skip Hop and Sesame Street. This adorable must-have collection is focused on engaging our toddler consumer segment ages 2 to 5, and it will be featured in nearly all Carter’s stores on carters.com and at key retailers through our wholesale partnerships and time for back-to-school.
As we continue to evolve our market-leading style and value, we are also evolving our brand marketing. On Page 22 and throughout this presentation, you can see our fresh approach that will keep our brands as modern and relevant with Gen Z as they have been with the generations before. We love our new look. We believe it reflects the emotional power of our Carter’s brand and echoes the relatable day-to-day experiences of modern parenthood. To support our advancing marketing efforts, we have hired a new award-winning creative agency and our new brand campaign will launch in early Fall.
Turning to Page 23. Social Media is playing an increasingly important role in our marketing spend. Nearly half of discovery begins on Social Media platforms. To respond to these shifts and behavior, we have distorted our efforts to grow our brand’s presence on Instagram Reels and TikTok through the engagement of influencers and talented social media creators. These strategic shifts have a positive impact on brand awareness, traffic and conversion.
In April, we relaunched our loyalty program and are excited about the early positive reads. Highlighted on Page 24, Carter’s Rewards offers a new structure that helps customers earn rewards faster and includes three membership tiers to better recognize our most valuable customers, an impressive 93% of our customers are enrolled in the program. It now features personalized offers, mobile app exclusives and perks like birthday rewards, all with the goal of building loyalty to drive frequency and retention.
Moving to Page 25. Returning to growth in our U.S. retail channel is the most impactful component of our 2024 strategic objectives. Stores remain an important part of this growth, and our long-range plan includes continued store openings. Our stores are our #1 source of customer acquisition, and they averaged $1.3 million in sales with a 25% four-wall EBITDA margin. Additionally, new stores give us the added benefit of lifting our e-commerce sales in the surrounding area.
To achieve our retail store goals, we are implementing a comprehensive fleet optimization strategy, which includes opening new stores, remodeling our existing fleet and customizing our store assortment based on demographics, geography and climate. Our fleet optimization efforts leverage the learnings of our ongoing store reimagined project, through which we are testing new store models outlined on Page 26.
Last summer, we reimagined our 150 side-by-side stores to create a more customer-centric experience, highlighting Baby and Toddler on one side of the store separated from the kids space on the other side. Since we made this change, our side-by-side models have shown significant comp sales trend improvement and in Q1 delivered the highest comps in the chain. We also recently tested a smaller Baby Only format featuring our most premium Baby and Toddler assortments from all of our brands.
Performance since the recent launch is very good, success with this best of baby format will further our ability to open additional new stores in premium malls. Our retail store growth strategies are complemented by our e-commerce initiative to strengthen site performance and drive traffic, highlighted on Page 27.
Customers that shop both of our channels, are our most loyal and valuable and our omni-channel capabilities are helping to drive increased retention. While traffic to our site has been under pressure, we believe this is largely a macro challenge. Our conversion and average transactions remain healthy, and we benefit from a highly profitable and penetrated e-commerce website. Finally, one of our company’s greatest strengths is that our brands are sold through over 20,000 points of distribution across North America, including at Target, Walmart and Amazon. Our exclusive brands, Just One You, Child of Mine and Simple Joys highlighted on Page 28, represent a significant portion of these top retailers Baby assortment and our overall business and partnerships with them remain strong.
At Walmart, we expect growth this year through increases in assortment breadth, inventory investment and door count, all supported by strong consumer demand for our brand. In closing, we look forward to sharing our progress with these exciting growth initiatives on upcoming calls. Richard will now walk us through our financial outlook.
Richard Westenberger
Thanks, Kendra. Now turning to our outlook for the second quarter and balance of the year, beginning on Page 30. Second quarter net sales are forecasted in the range of $560 million to $570 million. The majority of the planned decline in Q2 sales versus last year is driven by U.S. retail, where we’re planning total sales down in the mid- to high single-digit range and comparable sales down in the high single-digits.
As Mike mentioned, sales in April have been soft. The earlier Easter holiday shifted some sales to the month of March and the persistent cooler weather has continued to dampen demand for warmer weather apparel. Comparable retail sales over the combined March, April month-to-date period are down about 11%, and April month-to-date comps in our U.S. retail business are running down a bit less than 20%, but we’ve seen a generally improving trend as we progressed through the month.
Second quarter sales in our U.S. wholesale business are expected to be down in the low to mid-single-digit range largely due to a meaningful decline in planned off-price channel shipments, demand in the balance of wholesale is planned roughly comparable to last year. International segment sales in the second quarter are planned down in the mid- to high single-digit range principally due to the timing of wholesale partner shipments and lower wholesale bookings.
We expect Mexico will build on its strong first quarter performance, and we’ll have continued momentum in its retail comps, and we’re anticipating an improving trend in Canadian comps. We’re planning for gross margin expansion in the second quarter, driven by lower product and transportation costs. Additional assumptions for the second quarter are summarized at the bottom of the page for your reference.
On profitability, adjusted operating income is planned in the range of $25 million to $30 million with adjusted EPS in the range of $0.35 to $0.45. It’s important to note that the second quarter has typically represented the lowest quarterly contribution to our full-year sales. Second quarter sales were about $100 million lower than the first quarter, which has historically been the case for the transition from first to second quarter in our business. The lower forecasted profitability in Q2 tracks to the lower level of sales and expense deleverage from our relatively high fixed cost structure.
On Page 31, we’ve summarized our key sales and earnings drivers for the second half of the year. Kendra covered many of our key initiatives, which are intended to drive our top line which include improved product, more effective marketing and a stronger retail store fleet. To this list, I would add a better level and mix of inventory given our significant reduction in pack and hold and excess inventory. Higher planned U.S. wholesale bookings in the second half and expected continued growth in Mexico and Brazil.
In terms of earnings drivers, we’re planning to benefit from planned sales growth, an increased mix of high-margin, more premium-priced product offerings and gross margin expansion driven by lower product costs. We’re also planning for SG&A leverage and a lower share count. Now turning to Page 32 with our expectations for the full-year in 2024. We’re expecting a stronger second half this year with an improving trend of consumer traffic and demand as we move through the year, in part due to the collective benefit of the very full slate of initiatives which Kendra articulated, and we expect to return to positive retail comps in the second half of the year.
Given our first quarter performance and a slower start to the second quarter, we’ve widened our guidance range to reflect what may be a somewhat more modest trend improvement in our retail business than originally anticipated. Overall, we’re planning net sales in the range of $2.950 billion to $3 billion. This said, our efforts remain focused on achieving the high end of the sales range. In our U.S. retail business, we’re planning total sales in the range of down low single-digits to up low single-digits with a low single-digit decline in full-year comparable sales.
Sales in our U.S. wholesale business are planned up in the low single-digits and international sales are planned comparable to 2023. In terms of profitability, we’re planning operating income in the range of comparable to last year to up in the mid-single-digits. Earnings per share is planned up in the low to mid-single-digit range. Risks, which we’re monitoring include the pace of improvement in reducing inflation across the economy, the impact of current and potentially expanded conflicts around the world and consumer confidence in the context of the overall economic backdrop and the upcoming Presidential election.
With these comments, we’re ready to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] One moment for your first question. And our first question will be coming from Warren Cheng of Evercore ISI. Your line is open.
Warren Cheng
Hey, good morning. Thanks for taking my question. I thought the chart from the presentation, which showed the positive comps in the North, negative comps in the South for March was really interesting. Are you seeing that same difference hold up in April? And are you seeing a difference in open air versus in closed malls again for the month of April?
Michael Casey
I would say April was not a good month for us. Given the shift in Easter, we knew there would be a shift in Easter. We didn’t realize just how the consumer behaved — react to the cooler weather and the shift in the Easter holiday. But I’d say our comps in the first week of April were down over 30%. Second week improved to down 17%. I think the third week was down 7%. And I think this past week was just slightly negative.
So you could see as you get closer to more of the country warming up, but we got clobbered in that first week of April. It was an unusual. I mean we’ve seen shifts in Easter for many years in the past. I don’t think I’ve ever seen as dramatic a drop in demand given the shift of Easter. So I think it was a combination of the earlier Easter and the cooler weather. I think the more important point, Warren, is I think the consumer has pulled back. They’re shopping closer to need and with the weather cool, I looked at this morning, people woke up to 40-degree weather in New York City this morning.
That’s not exactly lends itself to Spring outfitting. So it ultimately warms up. You can never tell when it’s going to warm up, it ultimately will. We’ve seen this in many years past, we’ll see the same trend later this year. Remember last October when we were updating it. It was just too hot out. People weren’t ready for the cooler weather gear, but we had a strong finish in November and December last year when people got more into the swing of the holiday shopping.
But the overarching thing, I think, with the consumer under pressure, our target consumer under pressure, I think the consumer is shopping much closer to need and only when the product is needed. With the weather as cool as it’s been, they just don’t need the Spring outfit yet, but they will.
Warren Cheng
All right. That’s really useful color. And your guidance implies close to the double-digit growth in wholesale in the second half. I think that’s a little higher than you’re thinking in February. But I think you also flagged that you’re still seeing some conservative orders from some of your partners. Can you just parse it out in a little more detail where things have been a little bit better or worse for February?
Michael Casey
Definitely better. But the outlook for wholesale is definitely better. The replenishment has been good. The demand for seasonal goods has been good. And to your point, I would say across the board, we deal with the best retailers in the world. Many of them have been in here in Atlanta, looking at the new Spring product recently Spring ’25. Product recently, the relationships are excellent. But the common thing, better retailers, including Carter’s are running much leaner on inventories.
When you run lean on inventories, you’re seeing better sell-throughs, better price realization, better margin, less clearance on the shelves at the end of the season. It’s a much healthier model when you’re chasing demand. So that’s what we’ve seen. This is — I guess this would be the fifth consecutive quarter where wholesale demand was higher than we planned. We have actually orders in start ship dates. But with the better sell-throughs that our wholesale customers are seeing on leaner inventories, they’re saying if we’ve got the product, they just soon take it in because the day we ship it, it takes them about four weeks to get it on the floor.
And just given their supply chain capabilities, it takes the better part of the month to get the new product on the floor. But when that new product hits the floor, the consumer sees it and it gets the register ringing. So I would say wholesale both seasonal and replenishment outlook is better than we envisioned in February.
Warren Cheng
Thanks, Mike. Good luck.
Michael Casey
Thanks, Warren.
Operator
And one moment for our next question. And our next question will be coming from Jay Sole of UBS. Your line is open.
Jay Sole
Great, thank you so much. My question is, is the trends that you’ve seen over the last 90 days, has that caused you to think about maybe leaning on promotions a little bit more as a lever to drive traffic into your stores? Obviously, you had this goal and you’ve been very successful driving gross margin improvement. But just given the trends, especially what you’re seeing in April, how do you feel about maybe trying to maintain a little bit more market share in your stores by maybe do a little bit more promotion?
Michael Casey
Yes, Jay, I would say we were a bit more promotional in retail than we had planned. The prices were down about 4% in the first quarter in retail, largely driven by the new Everyday Value pricing strategy and the consumers responded to it. We had about a 5% lift in unit volume in the first quarter. I would say our plan in the balance of the year, pricing will be probably down low single. It won’t be down to the mid-single-digits that we had in the first quarter.
But Jay, the key thing for us, are we competitive. And I feel as though our market analysis would suggest we are competitive. Our brands sell for about $1 or $2 above private label. Consumers expect to pay a premium for a national brand that’s true in bottled water. It’s true in paper towels and it’s true in kids apparel, and Carter’s is the best-selling brand in young kids apparel, best-selling national brand in young kids apparel.
So we’re mindful of where we need to be competitive. The risk you get, Jay, is if we decided let’s get more aggressive on pricing. Let’s — given the weaker consumer environment, let’s get more aggressive on pricing. We don’t — as long as we stay competitive with private label, which is, by and large, our largest competitor, and we’re mindful of what our brand is selling for — throughout our wholesale customer base, you certainly don’t want to undercut our wholesale customers.
So I feel as though we’re competitive. That’s — at the end of the day, that’s our responsibility to make sure we’re competitive. The risk getting deeper on discounts now, what do you do next year? We’re trying to establish a very profitable base in our business that we can grow on in the years ahead.
Jay Sole
Okay. Makes sense. Thank you. And maybe just, Richard, if I can follow-up. Just on quarter-to-date, obviously, the Easter shift is impactful in that number. And you said, I think things have gotten better over the last couple of weeks. Is there any way you can sort of maybe explain to us like a current run rate, like just based on all the ups and downs and weather and this and that, like where you see the business running today?
Richard Westenberger
Yes, Jay, I would say each week has gotten better as we’ve gotten further away from that kind of Easter holiday shopping grid, which was not strong for the reasons that Mike mentioned. So each week has gotten better. I’d say, over the last week, we’re in more of that very low single-digit down comp range for retail, but showing good signs of improvement.
Jay Sole
Excellent. Okay, thank you so much.
Richard Westenberger
Sure.
Operator
And one moment for our next question. And our next question will be coming from Ike Boruchow of Wells Fargo. Your line is open.
Ike Boruchow
Hey, good morning guys. A couple of questions. I just wanted to clarify something. So Mike, to the question from Jay, I thought you just said that the plan for the rest of the year retail and AUR was down low-single. But I thought Richard said earlier in the prepared remarks that the plan on AUR was flat to up the rest of the year. Can you just clarify that for us?
Richard Westenberger
Yes. I can in the retail business, we’re planning for comparable to up AURs. I think when you factor in wholesale, which had a bit more of those strategic price reinvestments, it blends to a kind of down low single-digit for the entire company. But in our U.S. retail business, expected to be comparable to up.
Michael Casey
And down low single-digit for the year.
Richard Westenberger
Correct.
Ike Boruchow
Okay. And I guess, what I’m trying to wrap my head around, Richard or Mike, is so understanding the headwinds that kind of took place quarter-to-date and what they are. The implied guidance to kind of get to your down high-single, I think is like — I’m sorry, down high single for Q2 is basically down low-single the rest of the month, and then you’re planning up low-single in the back half on comp to get to that full-year guide.
But it seems like you’re planning to see that improvement on better AUR because it was just down 4% in the first quarter. So I’m just trying to understand what are the strategies that help inflect the comp meaningfully while also doing it in a less promotional way? I’m just trying to understand exactly what under the covers — what exactly you guys have planned that gives you that confidence?
Kendra Krugman
Sure. Let me try to articulate a little bit differently. So in our retail business, this year, we have a few strategic pricing strategies that will help us deliver on our promise of value to our customer. So one of those is our Everyday Value pricing strategy, which we outlined. So that started in Q1. That will have a full-year impact, but we really proactively planned for that in our business in the second half, and we — but we started it earlier than we originally intended.
But that was not a reactive strategy. That was kind of a very consumer forward decisions that we made in Q1 that impacted our AUR versus last year. The biggest two impacts that Mike mentioned, though, were really clearance selling in Q1. So we came into this year with more clearance than we did last year with great intention. We were missing it last year. So that shift caused an AUR decline in Q1, we won’t realize that through the rest of the year.
The second piece of that is to also register value with our consumer, we are going to the right price sooner. So versus last year, we’re running some programs at 20%, 25% off rather than this year getting to the 40% kind of strategy price earlier on in the season. That is planned for the rest of the year in our business model. That was something that we decided to add late in Q1. Those are major shifts that we’re making. So these were not like reactive run to promotions because business is soft Q1 initiatives. These were very thoughtful initiatives. It’s just the impact in Q1 is greater. So we’re really confident with our AUR strategy we moved through the year.
Michael Casey
Yes, Kendra. Just one thing I would add to that, Ike. So we’ve been dealing with the baggage of pack and hold inventory for the past four years. And — but by and large, that’s behind us. So our wholesale customers and our retail team made the most out of inventory that backed up when the music stopped in March of ’20 with the pandemic and then again in the middle of 2022 when inflation hits.
So rather than discount the daylight side of that product, we packed and held a better part of $100 million of inventory, sold it through the Lion’s share of it in ’23. You don’t have that in ’24. I would say the mix and level of inventory in ’24 will be better than it has been in the previous four years. So we’re not — so again, with better product, you’ll see better price realization. With better inventory levels, you’ll see better price realization.
Ike Boruchow
Got it. Super helpful. And just one quick follow-up on the guidance as well. Comparable SG&A in the second quarter, is that dollars or rate, Richard? And then just on the 2H sales and comp growth, could we expect that as means both quarters? Or are we just talking — could that be more 4Q weighted and we’re just talking in aggregate 2H?
Richard Westenberger
On the SG&A point, it was more of a dollar reference. So it’s more comparable dollars, not expecting leverage from a rate point of view. And on your second question again, Ike?
Ike Boruchow
Just you’re guiding 2H sales growth and 2H comp growth. And I’m just — I’m asking, is that for both quarters? Or could that be more of a 4Q weighted benefit?
Richard Westenberger
Yes. I think the sales growth we’re planning is more weighted towards fourth quarter than it is third quarter.
Ike Boruchow
Okay, good. Thanks guys.
Richard Westenberger
Sure.
Operator
One moment for our next question. And our next question will be coming from Tom Nikic of Wedbush. Your line is open, Tom.
Tom Nikic
Hey, good morning guys. Thanks for taking my question. I just wanted to ask about margins. So obviously, you had really good gross margin expansion in Q1 and there’s [indiscernible] some product cost benefit that you’re seeing. I guess, kind of when I run through the model and you said leverage on SG&A for the back half and given where the revenues are and leverage on SG&A, it implies that there’s much less gross margin expansion in the second half of the year.
Is some of that — the pricing, is it just much less raw material benefit, et cetera. Could you just help me just think about how we should think about gross margin expansion for the back half, that would be helpful.
Richard Westenberger
Yes. Sure, Tom. I would say the first half and the second half are a bit different in character. In the first half, we’ve had the year-over-year favorability still from the transportation, the ocean transportation rates being favorable. That reverses a bit to Mike’s point, we’re looking more towards low single-digit increases in those rates with the new contracts, which are effective kind of now.
So that hits a bit in the second half. It’s not all that material, but it is a shift in rates from where we’ve been. You do have the strategic price reinvestment, which is a bit of a drag on margin. Last year, we were also in the second half of the year because of the dramatic progress we made reducing pack and hold inventory. We were releasing some inventory reserves, so we don’t have an assumption that we’re going to be taking reserves down this year, which works against us from a gross margin point of view.
But you have a nice mix shift as we’re expecting the growth in the retail business. That is the gross margin-rich part of the business. And then you have those other factors that I mentioned around what’s going on with freight rates.
Tom Nikic
Understood. And if I can just follow-up on DTC. I think obviously, e-commerce has been very difficult for you several quarters in a row. And I mean, are you finding that initiatives that you take on to try to improve the retail comps that it’s just easier to execute in stores than it is e-commerce? You can have a better presentation in the stores and better assortment and merchandising and things like that, but it’s just — it’s tougher to crack on the e-commerce side? Or I guess like why are we seeing these like really, really persistent double-digit declines in e-commerce? And even though it seems like the stores are starting to see some improvement.
Michael Casey
Just a couple of reactions. So the e-commerce trends, I’d say, are largely consistent with what we’re seeing from Citi. Citibank came out with good analysis on 40 different levels of credit card spend over a year ago, and it caught our attention, and we started tracking the trend in e-commerce sales, what they describe as online pure-play apparel sales, all ages, including kids.
And what we were struck by is the similarity between those weekly trends in our own business. And we look at it every week, it’s very helpful to us, and it would suggest that year-to-date online pure-play apparel sales, all ages, the credit card data would suggest is running down about 14%, and that’s about — that’s consistent with what we’re seeing. So I think it’s largely a macro. We have no shortage of resources focused on our e-commerce business. But the one thing you need to shop online is a credit card and with people maxed at our target consumer, how they’ve been affected by doubling the gas prices, higher food prices.
The interest rate on our Carter’s credit card is over 30%. I’ve heard from family members talking about the kind of interest they’re paying on their credit cards. So I think it’s a macro issue. I think it’s a good experience. It’s still a very — our e-commerce business is still a very high-margin component of our business, but the growth has slowed. For years, it was our fastest-growing, highest-margin business, still is one of our highest margin businesses. Same thing as we look at it, we want to make sure we’re competitive and that we analyze our pricing against everybody else’s. And so we focused on the user experience. We focus on search engine optimization.
We’ve engaged a new media and creative agency this year to help us drive more traffic both to the stores and to e-commerce. I think what our stores do is our stores provide the very best experience with the brands. They provide immediacy to fulfill the needs that consumers have. And again, our target consumer families with young kids, they’re shopping closer to need and when they need it, they can swing by one of our conveniently located stores and pick up what they need. And you got the full breadth and you can see what you’re buying because it’s more important to understand the quality of the value that you’re getting.
But we will continue to focus on distorting the performance in our e-commerce business in the balance of the year. I think what we’re dealing with is largely a macro issue. There’s no shortage of ways we can improve the e-commerce experience. We’re focused on the things we can control. But I think based on what we’re seeing in third-party credit card data, we’re dealing with largely a macro issue.
Kendra Krugman
I would add to that, that our conversion remains very strong for those who do come to our website.
Michael Casey
Yes, conversion and average transaction. The average transaction wouldn’t be improving if they didn’t think we were competitive. But those who come, like what they see, conversion in the average transaction are higher than last year. But traffic is the challenge. So we’re focused on traffic, and we’ll see whether or not we can make progress in the balance of the year.
Tom Nikic
Understood. Thanks very much. Good color. And best of luck for the rest of the year.
Michael Casey
Tom, thanks very much.
Operator
Thank you. One moment for our next question. And our next question will come from Paul Lejuez of Citi. Your line is open. And Paul, your line is open.
Paul Lejuez
All right. Thanks guys. Just curious if you can talk about the March, April period that you mentioned. In the week period, I think you said down 11%. Can you talk about the sellout trends that you’re seeing in your wholesale partners? And specifically, what are you seeing at the Big 3, Target, Walmart, Amazon versus the rest of your partners in that wholesale channel in terms of sell-out, did they see the same sort of big deceleration in April?
And then second, I’m curious if you could talk about new store productivity and the recent classes of stores, how that has worked. And what does comp performance look like on average in those recent classes of stores once they enter the comp base? Thanks.
Michael Casey
So I would say, I won’t comment on any retailers or wholesale customers specifically. Paul, what I would say is that what we saw in the early weeks of April, business generally was sluggish with Spring selling, whether it was direct-to-consumer or over-the-counter at many of our wholesale customers. Spring started out slow. But as more parts of the country are warm enough, trends are improving.
The benefit we got in the first quarter is that the wholesale customers were saying, let’s get that product in early in anticipation of the warmer weather. You had a question in terms of the trends in terms of the new stores, their contribution, their performance once they start comping.
Kendra Krugman
Sure. We — in the last four years, including the Fall of 2024, we’ve opened about 130 new stores. The contribution of those stores annualizes around $130 million with a really nice EBITDA. So we are still seeing the benefit of opening new stores. Very specifically, our newer stores are our best comping stores quarter-to-date so — or in Q1. So we feel good about the comp performance. Our 2022 class achieved a 2.1 positive comp in Q1.
Paul Lejuez
Great, thanks guys. Good luck.
Michael Casey
Paul, thanks very much.
Operator
And I would now like to turn the call back to Mike Casey for closing remarks.
Michael Casey
Okay. Thanks very much. Thank you all for joining us this morning. We look forward to updating you on our progress in July. Goodbye.
Operator
And this concludes today’s conference call. Thank you for participating. You may now disconnect.
