Carter's, Inc. (CRI) Q1 2017 Earnings Call Transcript
Published at 2017-04-27 13:21:05
Michael Casey – Chairman and Chief Executive Officer Richard Westenberger – Executive Vice President and Chief Financial Officer
Ryan Wallace – Citi Susan Anderson – FBR & Company Anna Andreeva – Oppenheimer Joe Wyatt – Morgan Stanley Jim Chartier – Monness, Crespi & Hardt Warren Cheng – Evercore ISI Steve Marotta – C.L. King & Associates David Buckley – Cowen and Company Ike Boruchow – Wells Fargo Janet Kloppenburg – JJK Research
Good day, everyone, and welcome to the Carter's First Quarter 2017 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 Sean McHugh, Vice President and Treasurer. After today's prepared remarks, we will take questions as time allows. Carter's issued its first quarter 2017 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 www.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. 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 Report filed with the Securities and Exchange Commission and the presentation materials posted on the Company's website. On this call, the Company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the Company's earnings release and presentation materials. Also, today's call is being recorded. And now, I would like to turn the call over to Mr. Casey.
Thanks very much. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I'd like to share some thoughts on our business with you. We exceeded the sales and earnings goals we shared with you on our last call. We believe that delay in tax refunds to families with young children and the late Easter holiday impacted our first quarter growth. In the weeks leading up to Easter, we saw a significant increase in demand for our brands and are encouraged by the current trends in our business. Traffic to our brands is up. E-commerce demand is strong and our co-branded stores continue to be our best performing stores. And with warmer weather arriving in more parts of the country, spring selling is meaningfully better in all channels of distribution. Our new Skip Hop brand exceeded its first quarter goals. The integration is fully underway and going well. We're also announcing today the launch of our new brand Simple Joys of Carter's brand designed exclusively for Amazon. With this launch, we now have four of our brands selling on Amazon. With the contribution of Skip Hop and Simple Joys together with our other growth initiatives, we believe we're on track to have another good year of sales and earnings growth. With respect to business trends on our earnings call on February, we briefed you on the sluggish start to our year. The best information we had at the time suggested that the delay in tax refunds and the timing of Easter were weighing on our performance. As we shared with you March represents the largest month in terms of sales and earnings contribution in the first half of the year. Thankfully given the strength of our product offering and brand marketing, we exceeded our sales and earnings goals in March. In April, we saw a significant ramp-up in sales in the weeks leading up to Easter. Easter is the most important holiday shopping period in the first half. Interestingly nearly 80% of our retail sales during our Easter promotions were done in our stores, a slightly higher percentage than last year. With the benefit of strong Easter holiday sales, comparable retail sales have improved from down 3.5% in the first quarter to up nearly 2% year-to-date. We’re expecting good positive retail comps for the second quarter and the year. We expect that largest source of our company’s growth over the next five years will come from our e-commerce business. According to third-party research, our e-commerce business was the second largest contributor to the growth in online sales of young children’s apparel in the United States last year, second only to Amazon. In recent weeks, there have been several reports of retailers closing stores. We’re often asked why open stores when others are closing stores. We continue to believe that our stores are an important part of our brand experience for families with young children. Our latest consumer data suggest that in the past 12 months 86% of our active customers shop in our stores. And our multi-channel customer, those who shop in our stores and online is the fastest growing segment of our customer base with annual spending significantly higher than the single channel customer. Very high percentage of our stores are contributing to both sales and profitability. Given our rich margin structure substantially all of our stores are cash flow positive. We have a discipline of closing about a dozen stores a year. We don’t currently expect that run rate to change meaningfully in the next three to five years. We have the flexibility to close more stores if needed. The average effective term of our leases is less than 3.5 years. Going forward, if we see fewer good real estate opportunities or less attractive returns on new store openings, we’ll slow the pace of store openings and pursue other opportunities to achieve our growth objectives. Given the availability of good real estate opportunities and the success of our co-branded store model, we plan to open 240 more stores by 2021, which we expect will contribute about $250 million to our growth plan. In addition to the growth we’re expecting in our retail business, our new Skip Hop brand is expected to provide the next largest source of growth for us. We’re forecasting about $90 million of sales from Skip Hop this year and planned to double its sales and earnings by 2021. The integration of Skip Hop is going well. We’re impressed with the quality of their team and planned to launch their product offerings on our website and in our stores in the second half of this year. Our new business with Amazon is ramping up nicely. We tested some unique product combinations in the fourth quarter of last year with success. Starting this spring, we have expanded the scope of our product offering for them. Over the past year, we’ve been working with the Amazon to launch our Simple Joys brand, a Carter's brand, developed exclusively for Amazon. We've modeled this new business after the successful launches of our exclusive brands developed for Target and Wal-Mart years ago. Today Target and Wal-Mart are two of our largest customers. With this launch, we believe Carter's has strengthened its position as the largest supplier of young children's apparel to the largest retailers in the country, reaching even more consumers with our beautiful brands. Our new growth initiative in China is also ramping up nicely. As you know we launched our Carter's brand on Alibaba's Tmall website in 2015. Tmall is the largest most successful e-commerce business in China. Carter's was recently honored by Alibaba and recognized as one of the most popular young children's apparel brands on Tmall. It’s a very special recognition of the good work done by many people throughout our company following our first full year with this new initiative. Last year, we announced a new strategic relationship with Pou Sheng, a $2 billion retailer of great brands, including Nike, Skechers and Levi's. Pou Sheng currently manages over 8,000 store locations in China. Last month, we met with Pou Sheng’s new CEO, who shares our enthusiasm for opening Carter’s stores in China. I've seen the stores they've opened in Beijing and they're beautifully executed. To date 14 stores have been opened with a plan of 50 or more stores opened by the end of this year. If these stores continue to meet our shared expectations, Pou Sheng plans to open 200 or more stores by 2021. We expect our business in China and Canada to drive some portion of $200 million in sales growth over the next five years. Our supply chain continues to support our growth objectives with excellent on-time deliveries and lower product cost. Over 50% of our products will be sourced directly from our suppliers this year. We're building our capabilities in Asia to enable 70% of our products to be sourced directly by 2021. We believe this initiative has created a more competitive sourcing model for us and it will help us achieve our long-term margin objectives. In summary, we’re pleased with our progress so far this year. We have multiple opportunities to strengthen our business and gain market share. We’re fortunate to own two of the best known brands in young children’s apparel and excited to have added two new brands Skip Hop and Simple Joys to our business. I’m grateful for the personal commitment from our over 20,000 employees throughout the world. We’re working hard around the clock to provide families with young children a great experience with our brands. With their support, we expect 2017 will be another good year of growth for us. Richard will now walk you through the presentation on our website.
Thank you, Mike. Good morning, everyone. I'll begin my comments on Page 2 of today’s presentation materials with some highlights of our first quarter. We exceeded our prior sales in earnings guidance largely due to better than forecasted e-commerce performance in both the U.S. and Canada from earlier than planned demand in U.S. wholesale and lower than planned spending. Consolidated net sales grew 1% over last year driven by strong growth in our e-commerce businesses and the contribution form Skip Hop, which we acquired this past February. We have planned earnings down in the first quarter due to lower spring seasonal bookings in our U.S. and international wholesale businesses, because of the Easter holiday shift from March to April and increased investment spending. Q1 adjusted EPS came in at $0.97 per share, a decline of 8%, but above our prior guidance of $0.80 to $0.85 per share. So that’s made a good portion of the first quarter outperformance relative to our forecast, represents favorable timing of wholesale shipments and spending, favorability which we expect will largely reverse as we move through the balance of the year. On Page 3, we summarized our year-over-year sales performance in the first quarter. As we told you on our last call, we have implemented some changes in our business segment reporting beginning in the first quarter of 2017 to better align our financial reporting with how we manage and evaluate our business. With these changes Carter's and OshKosh domestic retail results have been combined into a single U.S. retail segment. Similarly Carter's and OshKosh domestic wholesale operations have been combined into a single U.S. wholesale segment. Our international segment is unchanged. Skip Hop's results have been incorporated into the appropriate segment, which in the first quarter largely represented contributions to U.S. wholesale and international. So with all of that in mind, our U.S. retail segment grew 3% in the first quarter driven by particularly good performance in our e-commerce business. Sales in the stores component of U.S. retail declined year-over-year, which we believe reflected a more significant shift than we had planned of Easter demand into the second quarter and delayed tax refund. Sales in our U.S. wholesale business were roughly comparable to last year. We had plan for core Carter's and OshKosh wholesales sales to be down year-over-year. The actual decline in sales was less than we anticipated as several retailers accelerated their demand for spring product. Skip Hop sales were also additive to the wholesale segment in Q1. International segment sales declined 2% with good growth in our e-commerce businesses in Canada and China that was offset by expected declines in shipments to our wholesale partners. We believe the business as many of our international partners have been under pressure as a result of the stronger U.S. dollar and generally weak economies in their local market. I will cover our business segment results in more detail in a moment. Turning to our first quarter P&L on Page 4. Consolidated gross margin expanded by 20 basis points to 43.1%. This improvement reflects a mix shift to our higher margin retail business and lower product cost versus a year ago. Adjusted SG&A grew 8% in the first quarter and I will provide more color on SG&A in a moment. Interest and other expense declined 31% as last year in the first quarter we reported a $3 million loss related to unfavorable settlements and revaluation of foreign currency forward contracts. Our weighted average share count declined approximately 5% compared to last year, driven by our share repurchase activity. So again on the bottom-line first quarter adjusted EPS was $0.97 compared to $1.05 last year. Moving to Page 5 and SG&A, consolidated adjusted SG&A grew 8% principally due to investments in our U.S. and Canadian retail businesses, which include new stores, significant growth in e-commerce volume and technology improvement to improve our capabilities in areas such as workforce management, assortment planning and buying, inventory allocation and client optimization. We’ve also made good progress over the past couple of years in building our omni-channel capability. The Skip Hop acquisition and incremental marketing investments also contributed to SG&A growth in the quarter. SG&A in the first quarter came in somewhat better than we have forecasted, a portion of which was timing related and is expected to be incurred in the second quarter and later in 2017. Page 6 summarizes our balance sheet position at quarter-end and some highlights of our cash flow performance. Quarter-end inventory levels were up 15% versus last year. Skip Hop contributed approximately 7 percentage points to this year-over-year growth. The balance of the increase reflects growth in the business, including the launch of the Simple Joys brand and in part effective sales shifting into April due to the later Easter Holiday. As we exited the first quarter, we believe our inventories were in good shape and well aligned with our forward sales forecast. In the first quarter, we used our strong balance sheet and liquidity to support the Skip Hop acquisition and also return a significant amount of cash to our shareholders. Skip Hop was purchased for approximately $140 million in cash. We also returned a total of $65 million to shareholders comprised of $18 million in dividend and $47 million in share repurchases. We currently have just over $200 million remaining on our share repurchase authorization. Now turning to Page 8 with a summary of our business segment performance in the first quarter. Our consolidated adjusted operating margin declined by 210 basis points. The largest contributions of this decline was lower operating margins in our U.S. retail business followed by lower margins in the international segment. Operating margins in wholesale were strong in the quarter increasing 40 basis points versus last year. We’re forecasting that operating margins at the U.S. retail and consolidated levels will be meaningfully better in the higher volume second half than what we posted in the first quarter. Moving to our individual business segment results beginning with U.S. wholesale on Page 9. First quarter net sales in our U.S. wholesale business were roughly comparable to last year. As the contribution from Skip Hop offset declines in sales of Carter's and OshKosh spring product. As mentioned earlier first quarter sales in U.S. wholesale were above what we had forecasted back in February in part due to earlier than planned demand for spring product. U.S. wholesale segment operating profit was $70 million compared to $68 million last year. Segment margin improved by 40 basis points to 23.8% reflecting lower product cost and expense leverage compared to last year. Our outlook for fall 2017 seasonal bookings remained consistent with seasonal product demand expected to decline in the mid single-digit range. While seasonal bookings are expected to be down, we expect wholesale revenue this year will benefit from the annual launch of little baby basics in May, replenishment product sales and the launch the of new businesses such as Simple Joys with Amazon. For the full year, we’re projecting 2017 net sales in our U.S. wholesale business inclusive of Skip Hop to be up in the low single-digit range. Continuing with our U.S. wholesale segment on Pages 10 and 11, we’ve included some additional information on our business with Amazon. As Mike mentioned in the first quarter, we expanded our relationship with Amazon by launching the Simple Joys brand, which is exclusive to Amazon and it’s Prime members. As you can see we’ve brought some great branding and created the Simple Joys launch from a product perspective, the Simple Joys assortment is focused on unique product configurations and larger multi-packs of everyday essentials which are indented to deliver differentiated and strong value to Amazon consumers. Moving to Page 12, in our U.S. retail segment. Total U.S. retail segment sales in the first quarter increased 3% versus last year, our total U.S. retail comp declined 3.5% this reflected a store comp that was down about 10% and a strong e-commerce comp of plus 20%. We saw a significant shift in Easter demand from March into April, which meaningfully impacted our store comp performance in the first quarter. In addition, we believe the later Easter holiday also shifted to bring breaks around the country till later in the year. These spring breaks have historically been important to bring shopping period for us. As we noted previously, we also believe delays in income tax refund resulted in lost sales and further pressured store comps in the first quarter. Demand trends have improved significantly so far in the second quarter, our April year-to-date total retail comp is up nearly 2%. Regarding sales to international consumers in the first quarter, we've seen an improvement in demand from international customers from shopping in our U.S. stores and website, which we believe was driven by the greater stability and currency rate. Demand was stronger online than in our stores. In general, we saw better performance in our Florida and U.S., Canada border area stores, but less consistency in our U.S., Mexico border area stores. Segment operating income in the first quarter was $30 million compared to $39 million last year. Segment margin declined essentially due to store expense deleverage on the lower comps and investments in new stores. The operating margin in the e-commerce component of our U.S. retail business improved over last year. For full year 2017, we're forecasting the operating margin of the U.S. retail segment, to be roughly comparable to 2016. On Page 13, we provided some from upcoming digital marketing showcasing the re-launch of our little baby basics collection. The essential must have Carter's products that consumers know and trust. Our marketing investments are increasingly focused on digital media, which today represents the majority of our overall working marketing expense. To-date, we're seeing good returns from these efforts. We believe these programs are driving traffic and sales both online and to our stores. Page 14, features one of our newest co-branded stores in the Buffalo, New York area, by bringing our Carter's and OshKosh brands together in a single store we believe with smaller, more productive model provides a better experience for our customers and stronger financial returns compared to our previous store format. We ended the first quarter with 35 co-branded stores in the U.S. and expect to have about 70 of these stores by the end of 2017. Turning now to Page 15, and the international segment results for the first quarter. International net sales in the first quarter declined 2% on a reported basis and we’re down 4% on a constant currency basis. Lower demand from wholesale partners outside of Canada and China and lower retail store comps in Canada drove this decline. Regarding lower demand from our international wholesale partners, we believe the relatively strong U.S. dollar and economic weakness in various markets where our partners operate have depressed demand in this part of our international business. We are forecasting the sales to our international wholesale partners will be down through the balance of 2017. In Canada, total retail store sales were comparable to last year as the benefit of new store openings offset a store comp decline of 11.7% similar to our first quarter experience in the U.S. we believe store comps in Canada were meaningfully impacted by the shift in Easter demand for March and to April. In addition to more disruptive winter weather across much of Canada in the first quarter of this year compared to last year. International e-commerce performed well in the first quarter growing nearly 30%. Canada drove most of this growth comping up around 40%. China posted solid e-commerce growth as well. International segment operating income and margin both declined in the first quarter reflecting higher China-related cost and store expense deleveraging in Canada. Page 16 features a new Carter’s store opened by our wholesale partner in China. This store in the city of Chongqing opened in March and is off to a good start. We expect our partner will have approximately 50 stores opened in China by the end of this year. Moving to Page 17 with a brief update on Skip Hop, as you know we acquired Skip Hop towards the end of February of this year. Our integration efforts are well underway and we’re pleased with our progress. Key near-term areas of focus include adding Skip Hop to carters.com and to our stores. We expect good progress in developing both of these new channels of distribution for Skip Hop by the end of this year. Looking to Page 18, for our outlook on the second quarter and the year. For the second quarter we’re expecting net sales to grow approximately 6% to 8% compared to last year. We’re expecting revenue growth in all segments inclusive of the contributions from Skip Hop, while our U.S. retail business driving most of our planned growth. Adjusted EPS for the second quarter is forecasted to be in the range of $0.65 to $0.70 per share compared to $0.72 in the second quarter last year. This projection reflects increased spending to support our long-term sales growth, mainly investment in new stores, upgrading our e-commerce experience capabilities, other retail technology and marketing. For the full year, we continue to expect good growth in sales and earnings and are reaffirming our prior guidance. Net sales are expected to grow 4% to 6% driven by our U.S. retail businesses and the contribution from Skip Hop. Adjusted EPS is forecasted to increase approximately 8% to 10% compared to $5.14 in fiscal 2016. We expect the second half to drive the majority of our earnings growth for the year. Compared to the first half of 2017, we expect second half earnings to reflect higher sales growth in all segments and more significant benefit from Skip Hop and our outlook for more significant year-over-year gross margin expansion than planned for the first half of the year. We expect to open approximately 60 new retail store locations in the U.S. and approximately 15 new stores in Canada. We anticipate another solid year of operating cash flow in the range of $325 million to $350 million and CapEx of approximately $90 million. With these remarks, we're now ready to take your questions.
Thank you, sir. [Operator Instructions] And for our first question, we go to Kate McShane with Citi.
Hi, this is Ryan Wallace on for Kate. We just had a couple of questions on SG&A. Yes, first could you just prioritize the different buckets of SG&A spending related to your growth investments. And then at this point in time, when do you think you might start to lap some of that elevated SG&A spend?
Well, I would say Ryan that the most significant area of spend is around the growth of our regional businesses in general. So we have strong e-commerce growth that drives all the operational cost that come with a very solidly growing top line e-commerce business as the next biggest bucket would be the expenses related to new stores. As Mike mentioned in his remarks it is our intention to continue to open stores. So the ongoing kind of rate deterioration if you want to call it that is really driven by just the mixed shift of the business towards the higher SG&A format businesses, those businesses also carried a higher gross margin and we think ultimately higher operating margins. Beyond the store expenses, we have been investing in technology we're on probably the second, full year now, a fairly wholesome agenda around building our Omni channel capabilities as well as another, several other investments around, I think one of the core process of managing store as well, so we're making some investments around the assortment planning, price optimization, work force management, make sure that the labor investment that we have in our stores is optimized. So, I would say towards the end of this year, perhaps we're past some of that spending but I think the ongoing trend towards higher SG&A is being driven by the mixed shift in our business will continue.
Okay. Got it, thank you. And then on the Simple Joys launch, could you give any more detail around sort of what differentiates Simple Joys from the core Carter's and OshKosh product. And then how much of a contribution you would expect Simple Joys to make to the – at wholesale low single-digit growth target for this year?
Yeah, two things. First of all I don’t know compared to parse out the differentiation of revenue. So we will see how it goes, we’re excited about that, that launch. As far as differentiation, Simple Joys as Mike said it’s a Carter's brand. We designed it with a fresh modern perspective. I would say it’s the first brand we’ve done that’s 100% focused on the digital experience for digitally savvy millennials and a more affluent Prime customer. It is everyday value price and its multiple piece. Its multiple piece bundles and the Prime members obviously have free shipping as the benefit. So it is purposely built for multiple units. So we’ve got everything from three piece bundles all the way up to eight piece bundles. So it has higher AURs, but we’re excited about it. We worked hard with Amazon by testing Carter's bundles in the last quarter of last year we learned a quite a bit. And we’ve been selling it for about three weeks, the marketing is yet to hit, but we’re off to a good start, and we’re excited about the potential.
All right, thanks very much.
And for our next question we go to Susan Anderson with FBR & Company.
Hi, good morning. Congrats on a nice quarter.
I was wondering if you could talk about gross margin a little bit in second quarter as we kind of go through out the year, maybe just a little bit more color on how that kind of – I think originally you guys thought it was going to improve as we go throughout the year, is that still the same thoughts versus first quarter?
As is and that is the intention. So, our gross margin up around 20 basis points really acute drivers of that in the quarter. We have the mix shift to retail, fewer inventory related charges this year versus last year, and then we continue to have a benefit from lower product costs. I’d say, in our direct business grew probably a bit more promotional. We didn’t achieve all the pricing that we had intended in the first quarter, it is our forecast of it being substantially being much more meaningful as we move into the second half of the year.
Got it. And just from a pricing front, is it the competitive environment still that’s kind of dragging that down or is it just the traffic which is causing you guys and may be other retailers to be to be more promotional.
Well, I would say that in the first quarter there was a more significant shift to the business than to the second quarter from the first quarter than we had anticipated, so we’ve responded appropriately to manage our inventory position. It feels good about where we exited the quarter, that inventory generally doesn’t get better with time and so entering the second quarter with a clean inventory position as we have with 4Q that was probably more of the issue traffic than anything else in the quarter.
Got it. That’s helpful. And then on Skip Hop it looks like your $90 million target was about may be 5% or so growth is that coming from new distribution or is that organic growth that you are expecting.
Most of that largely will be from the core Skip Hop business and we won’t start to see anything meaningful from Skip Hop until the second half of the year. But we acquired about $90 million business, then we will get some portion of that and we will probably have some portion $90 million to $100 million of benefit from them this year. But that will start to come into second half of this year.
Got it, okay. And lastly on the wholesale front, so looks like strong replenishments in the first quarter. Would you guys expect that to continue into the second quarter and throughout the rest of the year? Or do you think the first quarter was kind of a one-off?
We are planning for strong replenishment in the back half of the year. We're launching our beautiful little baby basics line next week actually, that Richard I think showed a slide on that. So we're optimistic about our core products that replenishment business is an interesting when you look at the deconstruct in wholesale now. We do have that upfront bookings in Carter’s and OshKosh. As we've had in the past that now with the additional Skip Hop that’s primarily a replenishment business. We've now got about 30% of the wholesale business that will be replenishment going forward and we're optimistic about the prospects of that for the back half of the year.
Great. Thank you so much, you guys. Good luck next quarter.
For our next question we go to Anna Andreeva with Oppenheimer.
Great. Thank you so much. Good morning guys and congrats on the really great results.
I guess we had a couple of questions, not sure if you quantified this, but what was the whole sales shift and the lower expense benefit to the first quarter EPS? We’re just trying to understand what’s driving the magnitude of a EPS decline in the second quarter. And then secondly, with quarter year-to-date comps up Q, what does that imply for a quarter-to-date performance? I guess our both brands are comping positively right now. And are you guys seeing trends cold up, even post Easter weekend?
Staying on the first part of your question Anna, we’ve estimated that about $10 million of operating income, probably related to timing issues in the first quarter and that’s kind of evenly split between our earlier wholesale revenues and capability in spending, some of which then has an effect on Q2. I’d say the bigger effect on Q2, which we are forecasting good revenue growth is just higher investment spending. So some of the initiatives I mentioned around technology, new stores, all of that, that spending in China, all of that will have the effect of depressing earnings somewhat, good answer for the long-term, but it will affect Q2, which is our smallest quarter of the year.
Second quarter, yeah. On the second part of your question around, could you repeat that, Anna?
Yes, the year-to-date up to what is that imply for April comp, are both brands comping positively right now. And are you guys seeing the trends close out even post the strong obviously Easter weekend?
We have had strong business post-Easter. Today as Mike said, we have got low single-digit positive comp in retail. Our Carter's is strong than OshKosh at this point, but OshKosh is rebounding nicely as mom is coming out to buy her spring – spring key items as weather has turned around the country.
Okay, that’s great. Best of luck, guys.
We go next to Jay Sole with Morgan Stanley.
Hi. This is Joe Wyatt on for Jay. I just had two quick questions. The first one on your comp outlook, how much of a factor is the improvement in tourism or also the other border stores on your comp outlook? And then secondly on China like – are you looking for 50 stores for Pou Sheng for the year and also it seems a lot of good progress in Tmall. Can you talk about sort of how your awareness has improved there and what sort of change your expectations?
So the tourist business has been good, Florida particularly. So Florida is – we’re starting to see more people come back. I’d say it was probably one of the better segments of our business in the first quarter. South East was one of the better segments of store segments of our business. North East was the toughest, so longer winner up there, but the tourist business I would actually say has shown some good progress this year. And then with respect to China, I’d say we are making good progress. We’re expecting sales in China to be up probably over 30% this year. Larger component of the business will be the Tmall business. And so that’s the comps I think in the first quarter where Tmall probably up 20% or more. As I shared with you, we’re recognized by Tmall earlier this year as one of the most popular brands on their website. So we’re encouraged by the progress we’re making with Tmall. I think the brand awareness will come one of the reasons why we’re opening stores is all the research we have done would suggest it’s good to have an online presence, but very important to have an offline presence with the stores. We only have about 14 stores opened so far. I hope to have some portion of 50 or more opened by the end of the year dealers were in China a month or so ago looking at – the stores looking at the execution meeting with the Pou Sheng management team. I think they’re doing very good job for us. But this is a good long-term initiative, we didn’t do this to grow our business in 2017, it’s a good 5, 10, 20 year initiative to build the brand in China, but we’re seeing a good response, particularly on Tmall and as the year goes on we’ll update you more about the stores, but the stores we’re very pleased with the execution of the stores so far.
All right, thanks so much.
For our next question, we go to Jim Chartier with Monness, Crespi & Hardt.
Good morning nice quarter. My first question could you just give some estimated break-down for Skip Hop sales for the year, wholesale, retail and international?
In broad strokes as I said it is likely to be $90 million to $100 million of revenue for us, the majority of that will be wholesale. They have a recently small e-commerce business today, we hope to have them up and running on our website later this year. So that will be a contributor. For memory a 30% or so of their business is outside the United States that would fall into the international segment. But the majority we expect to be wholesale revenues from Skip Hop this year.
And then on Simple Joys how is the profitability of that business, this year is it going to be a drag on margins this year and then what is the potential on how does it scale going forward?
Sure. We would not see the drag on profitability for this year, I would say, we over time continue to be excited about that business. We won’t comment on the specific profitability but it is core product, it is a Carter's brand and we expect over time as volume ramps up that it will be a good profitable business for us.
Great. And then on the acceleration of wholesale shipments in the quarter, what do you attribute that to and is that creates some more opportunity for replenishment business later in that?
I think that the wholesale, we had less cancels, less discounts in the quarter and we did have a few different retailers move product in. As you recall, the track was bottling for spring we’ve booked down low-single digits. So as product sells through and retailers have open to buy money they tend to moved that up. So we were fortunate to have a few folks called said they wanted the product early, so we shipped it to them and so that was a move and we will see how it goes. January and February were challenging, regarding March, we had the benefit of the tax refunds coming out and then we had a strong Easter as did many of our wholesale partners. So as we go into a peak of spring selling we get into May and early summer, we would hope the trend continues, but it’s too early to tell.
Great. Thanks and best of luck.
We go next to Omar Saad with Evercore ISI.
Hi. Good morning, this is Warren Cheng on for Omar. I just have a question on the Amazon relationship. As you ramp up that relationship, how should we think about the net impact on wholesale? Obviously, there's a lot of product, I want a Carter's product that’s already running through Amazon via third-parties. But now as you approach that channel with your own – with the Simple Joys brand, that’s differentiated and optimized for that channel. How should we think about the net impact? So is there a difference in the economics when a third-party retailer sell to Carter’s through Amazon versus when it's sold directly through you? And how should we think about accretion on the sales side?
I would say this. I think we want to be every place mom wants to shop for young children’s apparel. And over time we demonstrated that we're going to continue to grow our market share. And it's important as these moms change their shopping behavior that we have our products available and channel the distribution if she wants to purchase them and so work size about the Amazon relationship. You've got about a $20 billion young children’s apparel market in United States. And again one of our goals is to continue to grow a deeper share of that market. And we think as moms are moving to Amazon for some of their products or some of their demand that we need to be there. But in totality, we intend to grow share there’s obviously mall traffic issues, there’s some retails sales are up, some are down but in totality our goal is to grow share and we think that being a partner with Amazon, which is the largest e-commerce retailer in United States is an important thing for our company. This whole relationship with Amazon started because the Amazon wanted a better experience for their consumers. So if you are going the Amazon when we first started having a discussion with the Amazon, they have a lot of one-off pieces, a lot of duplicate product on the site for the Carter’s brand. They wanted a better experience and from our discussions we decided to have unique bundling of product making it easier for the consumer to put some good looking outfits together. So the objectives, I think, will be in that, I think it’s going to be a better experience for the consumer, better performance for Amazon and we expect it to be a better performance for us.
Okay. And just to clarify, are you only selling Simple Joys on Amazon or you also selling the Carter's brand?
We go next to Steve Marotta with C.L. King & Associates.
Good morning, everybody. Richard, you mentioned earlier that average unit cost was a benefit in Q1. And can you talk a little bit about that dynamic in the back half of the year as well as pricing in those expectations as it pertains the growth in gross margin?
Well, we would expect the benefit of product cost will continue. We just continue to see good capacity in Asia. We’re driving terrific productivity with our new direct sourcing operations in Hong Kong. All of that is contributing, so it expected to be continued benefit. We don't have a visibility much beyond the second half of this year, but we obviously have cost of the second half product. For AUR for pricing, our forecast would be to have some modest improvement in the second half. So that's what’s taken into the gross margin as some slight benefit on pricing and continued favorability in product cost.
My second question as this relates to the pressure on the retail store traffic in the first quarter. How does that compare against your industry averages.
Let’s say, within the first quarter the traffic generally speaking was down in the industry some portion of that 10% or so is better portion of that. And then the second quarter traffic was – an industry-wide was probably down some portion of 6% or 7%, ours was meaningfully better than that, but still down but meaningfully better than that.
And we go next to John Kernan with Cowen and Company.
Good morning, this is David Buckley on for John. Congrats on a nice quarter.
Given the growth of SG&A expenses related to just the retail segment growth, can you just sketch what’s driving EBIT growth in the second half of this year?
Sure, John – David, excuse me, there's a number of things that are contributing we certainly expect that revenue growth will be higher in the second half and what our fewer forecast will achieve in the first half, as I mentioned gross margin expansion is expected to be more significant. There is a higher contribution from our cumulative share repurchase activity in the second half of the year. and I say, we're planning for a slightly lower growth rate in spending year-over-year, so all those things combined hopefully will lead us to higher both revenue and earnings contribution for the second half.
Okay. It’s very helpful. And then just second question on the wholesale segment, what's your outlook for margin expansion in that segment, you’ve benefited from lower product cost this quarter and some of the previous quarters. Do you expect that going forward?
Well, it's certainly a healthy operating margin business, but I don't think it’s our intention to look for significant expansion in those margins when we are looking to grow the top line, that’s probably more of our objective at this point.
Okay, thank you. Best of luck.
And we go next to Ike Boruchow with Wells Fargo.
Hi, good morning everyone congrats on a great quarter. I guess the two questions for you on the U.S. wholesale channel. I think Anna had asked you about the dollar shift that benefited you in Q1 it should help you in Q2. Could you just help us quantify that dollar shift so in order to think about the model a little bit better? And then just a bigger picture question about wholesale, could you talk at a high level about the department store business and may be the mass business within the channel?
Sure, Ike. I’ll start with the first part of the question, Brian will probably way in on the second. We’ve estimated its about $5 million of wholesale volume that shifted into the quarter that we had originally planned for second quarter. So that’s probably the input for your model.
In terms of department stores it’s continue to be probably the most challenging part of the business. We talked about bookings before being down low single-digits in spring as well as fall for seasonal bookings and a vast majority of that decline was predicated on department store. Bookings were down in terms of math we’ve got two customers, so we don’t usually comment that discretely on that business.
And we go next to Janet Kloppenburg with JJK Research.
Good morning, everyone and congratulations on a great quarter. A couple of questions, Simple Joys looks great on Amazon. I'm wondering if there is any thought to the brick-and-mortar wholesale accounts and what – if there will be any backlash from them given the launch on Amazon and if any of that is incorporated into your guidance. I was also wondering about your SG&A spending and just wondering if you inch that up as replenishment orders being better than expected, e-commerce business being better than expected. Is that a number that has some variability that we should think about as we plan our models. And lastly, on the border store business picking up, is there any reason why given easy comparisons et cetera that we shouldn't expect that to continue for rest of the year? Thank you.
Janet, on your first question we’re not expecting a backlash. You got to keep in mind the history of our company. We historically did business, a lot of business with the largest retailers in the country.
In 2001, we developed a very successful relationship with Target. I recall the time there was some concerns of those taking a Carter's brand to Target that was beautifully executed by Target. And Target is now one of our largest customers. A couple of years after that we launched with Wal-Mart and that was concerned whether or not there would be a backlash from our customers at the time doing business with Wal-Mart that was in our experience and now Wal-Mart is one of our largest customer. So, to Brian’s point we want to do business where the customer is shopping we wanted to make sure wherever the consumer is shopping for young children’s apparel, we have a great experience with our brands, we believe Simple Joys enables us to provide a better experience for the Amazon consumers. We are not anticipating any backlash.
On your question Janet on SG&A, I’d say if we have some sales upside that comes through the retail channel that would typically bring with it some additional expense particularly if it comes via the e-commerce channel. If we had more the upside coming from wholesale that’s a very low fixed cost investment we would intend to lever those expenses pretty directly.
But would you shift more spending into marketing let’s say if the business was trending better than expected?
Marketing is something we evaluate all the time our plans in general have layered an additional marketing for the second half for the entire year. If we continue to see the productivity that we’re seeing from our marketing spend we’re likely to spend more there.
Thank you. And just on the border stores?
Yes, our border stores, the border continues to strengthen, so we would hope that would continue to help us as we go through the year that the stores along the border Mexico don’t have deteriorated, they start to decline in Q4, they deteriorated further in Q1. So it's mixed results in terms of tourist, we are optimistic on the possibility.
Thanks so much and good luck.
And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Casey, I will turn the conference back over to you for any closing remarks.
Okay, thank you. Thank you all for joining us this morning. We appreciate your questions on our business. We look forward to updating you again on our progress in July. Goodbye.
And again ladies and gentlemen, this will conclude today's conference. Thank you for your participation. You may now disconnect.