Carter's, Inc.

Welcome to the Carter's First Quarter 2021 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 his First Quarter 2021 Earnings Press Release earlier this morning. A copy of the release and the presentation materials for today's call have been posted on the investor relations section of the company's website at ir.carters.com. Before we begin, let me remind you that the statements made on this conference call and in the company's presentation materials about the company's outlooks, plans, and future performance are forward-looking statements. Actual results may differ materially from those projected. For the discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation materials 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'd like to turn the conference 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. Carter's is off to a very good start this year. First quarter sales and earnings are meaningfully better than we had planned, with growth in each of our retail, wholesale, and international segments. We saw a surge in demand for our brands in March in the weeks leading up to Easter, with consumers responding very positively to the strength of our product offerings and compelling value proposition. We also believe we realized a significant benefit from the unprecedented government stimulus supporting families with young children. Thankfully, the benefits from the $1.9 trillion stimulus package will continue this summer, providing families as much as $300 a month for children under the age of six in the second half this year, and as much as $8,000 in tax credits for child care next year. With continued progress with vaccinations, we believe we may see a more meaningful recovery from the pandemic this year. Accordingly, we have raised our sales and earnings forecasts for 2021. In terms of sales trends, we got off to a good start in January with strong demand for our new spring product offerings. We lost ground in February with winter storms in important markets, including Texas. Sales in March were significantly better than planned. Historically, given the seasonality of our business, our sales in March are more than January and February sales combined. It's typically the largest month of sales and earnings contribution in the first half of our year. Sales in March were up nearly 60% compared to last year. It was the strongest demand in March that we have seen in the past five years. Our second quarter sales are also off to a good start as warmer weather continues to arrive in more parts of the country and consumers are more comfortable getting out to shop. Despite lingering COVID-related restrictions, we saw good demand for our brands over the Easter holiday shopping period. Last year, all of our stores were closed in the United States in the weeks leading up to Easter. A more meaningful comparison is to Easter in 2019. Compared to the Easter holiday shopping period in 2019, our retail sales were up 10%, driven by strong demand for playwear. The earnings on those sales were up over 30%. driven by improved price realization. Our retail segment was the largest contributor to our first quarter sales and earnings. E-commerce continues to be our fastest growing, highest margin business. Recall that we began to see a surge in online demand in March last year as stores closed in the early days of the pandemic. In the first quarter this year, e-commerce penetration grew to 40% of our retail sales, up from 37% last year and 30% in 2019. Over the years, we've invested significantly in the online experience for our brands. We improved the presentation of our product offerings, search capabilities, site navigation, ease of outfitting, and simplicity of checkout. We've expanded our online product offerings this year with new brands and product assortments that appeal to a broader group of consumers, including organic apparel and the tween market. We've also invested in omni-channel capabilities that leverage our stores in the United States and now Canada to provide a higher level of service and convenience for our online customers. We believe we're seeing the benefits from those investments in our very profitable e-commerce business. Increasingly, we are seeing our customers enjoy the convenience of shopping online and then picking up their purchases at our stores located near their homes. In the first quarter, we saw a 52% increase in customers using our omnichannel services. Our omnichannel customers are our highest value customers. They shop more frequently and spend nearly three times more than our single channel customers. Last year, We leveraged over 600 of our stores in the United States to fulfill online purchases. As a result, we improved the speed of delivery and earned a higher margin relative to shipping from our distribution center. Going forward, we're focused on fewer better higher margin stores. We plan to close over 100 low margin stores upon lease expiration this year. We're effectively driving consumers to our websites and higher margin stores located in more densely populated areas. Stores will continue to be an important part of our brand experience. Over 60% of children's apparel in the United States and Canada is purchased in stores. In the post-pandemic period, we believe there will be new and attractive real estate opportunities, which may enable us to revisit our store opening plan. Our current plan envisions only 10 store openings a year, beginning next year. Our wholesale segment was the second largest contributor to our first quarter sales and profitability. Collectively, we continued to see double-digit growth with our exclusive brands. We also saw good growth in our flagship Carter's brand and Skip Hop brand, each with double-digit growth in wholesale sales in the first quarter. E-commerce sales through our wholesale customers continued to be robust in the quarter, up over 60%. In the first quarter, we saw a double-digit percentage growth in baby apparel sales to our wholesale customers relative to last year. A very high percentage of our exclusive brands with Target, Walmart, and Amazon are focused on baby apparel. The latest market data suggests 7% fewer babies were born year over year through February. That said, we have not yet seen any meaningful impact on our baby apparel sales. Baby apparel was the largest component of our sales growth in the first quarter. Interestingly, our Carter's crib sales and Skip-Ops high-tier sales are also trending much better than a year ago. We are the largest supplier of baby apparel to the largest retailers in North America. If there is a prolonged slowdown in births due to the pandemic, we expect to see it in our results. As we move through the balance of the year, it will be interesting to see the impact of the new stimulus package, which supports families with young children. Despite the decline in annual births over the past decade, we've managed to grow and gain market share. We have the broadest distribution of children's apparel in North America. Wherever consumers are shopping for their beautiful new babies, they'll likely see a strong presentation of our brands. We also saw good growth in our toddler and four to 14 sized product offerings, including sleepwear, swimwear, and playwear. Thankfully, with broader access and acceptance of the vaccine, more schools are reopening in the final months of the school year, and we believe we're benefiting from that very positive trend. For the year, we're forecasting growth with nine of our top 10 wholesale customers. We plan to launch our new baby apparel and our fall product offerings in the second quarter this year. With many stores closed in the early days of the pandemic, nearly $50 million of our initial fall product launches shifted into the third quarter last year. The shift in timing of product launches will impact the year-over-year comparability of our quarterly results this year. For the year, we're expecting good double-digit percentage growth in wholesale sales and profitability. Sales in our international segment grew nearly 20% in the quarter. Our operations in Canada and Mexico had very good growth despite COVID-related store closures. E-commerce sales through our international segment more than doubled. Canada and Amazon's launch of our Simple Joys brand in Europe last year were the largest contributors to that growth. For the year, we're expecting a very good recovery in international demand for our brands. Canada and Mexico are still challenged by limited access to the vaccine and subject to COVID-related store closures. Assuming current lockdowns in Ontario, Quebec, and certain markets in Mexico are short-lived, we are forecasting double-digit percentage sales growth in Canada and Mexico. We've also forecasted a strong recovery and growth this year with our international wholesale customers representing our brands in over 90 countries. This is a highly margin accretive component of our business. The drivers of our growth in international markets include new omni-channel capabilities launched in Canada earlier this year. Consumers in Canada are responding very positively to the convenience of shopping online and picking up their purchases in our stores. We are the largest specialty retailer of children's apparel in Canada, with more than three times the share of our nearest competitor. In Mexico, we plan to replicate the success we've achieved through our co-branded store model in the United States and Canada. Over the next five years, we plan to convert all of our stores in Mexico to the co-branded model. Mexico also launched e-commerce capabilities last year, and it's off to a good start, better than we had planned. We're forecasting good international growth with our brands sold globally through Amazon, Walmart, and Costco. Our Simple Joys brand sold through Amazon is expected to be a meaningful source of growth for us in the years ahead. Our wholesale relationships with retailers in Brazil and the Middle East are also expected to be good contributors to our growth. With respect to our supply chain, we continue to be challenged by two to three week delays in the receipt of product from Asia. This is a macro challenge affecting many retailers. In general, the timeliness of receipts from Asia has not improved relative to the fourth quarter. Our suppliers in Asia have struggled to meet our shipping deadlines as infections to the coronavirus are outpacing their employees' access to the vaccine. As a result, we expect late deliveries may continue in the balance of the year, and we've reflected that risk in our forecasts. To mitigate that exposure, we are expediting deliveries at a higher cost. To the extent possible, we are also moving production schedules up to mitigate pandemic-related delays in Asia and the West Coast ports. Thankfully, our wholesale customers are lean on inventories and seeing good demand for our brands. To date, we have not seen any meaningful order cancellations due to late deliveries, but that's a higher risk than usual. Given the surge in demand in the United States when the market began to recover last summer, freight carriers have raised their prices. Higher distribution costs this year are being more than offset by better sell-throughs of our product offerings, fewer promotions, better price realization, and margins. In summary, 2021 is off to a good start. We're seeing strong demand for our brands. We're leaner on inventories and chasing demand. We're also seeing better profitability, driven, we believe, by the strength of our product offerings, benefit of government stimulus supporting families with young children, progress with vaccinations enabling more children to return to school, and the benefits from our productivity initiatives. Carter's continues to be the best in class in young children's apparel. Last year, an independent study ranked Carter's online shopping experience as one of the best in the United States and Europe. Earlier this year, a separate study ranked Carter's as one of the best loved brands in the United States. We continue to lead the market because of the strength of our brands. Unparalleled market distribution in over 19,000 store locations, and nearly 20,000 employees worldwide working to provide the best value and experience in young children's apparel. I want to thank all of our employees who enabled the strong start to our year and their commitment to achieve our growth objectives this year. Richard will now walk you through the presentation on our website.

Thank you, Mike. Good morning, everyone. I'll begin on page two with our GAAP income statement for the first quarter. Net sales were $787 million, up 20% from last year. Reported operating income was $127 million, compared to a loss of $78 million a year ago. And reported EPS was $1.96, compared to a loss per diluted share of $1.82 a year ago. Recall that last year's reported results included the adverse effects of the early days of the pandemic, including store closures, which began in mid-March, the suspension of shipments to many of our wholesale customers, meaningful inventory charges, and impairment charges related to goodwill and intangible assets. Our first quarter results for 2021 and 2020 included unusual items, which are summarized on page three. We've treated these items as non-GAAP adjustments to our reported results to enable greater comparability and provide insight into the underlying performance of the business. My remarks today will speak to our results on an adjusted basis, which excludes these unusual items. Turning to page four for a summary of highlights for the first quarter, as Mike noted, we delivered an exceptional quarter. Demand for our brands was very strong as consumers responded very well to our spring product offerings. We meaningfully exceeded our sales and earnings objectives for the first quarter. We achieved a record gross margin and managed spending well. enabling a reported operating margin of over 16%, our best quarterly performance in over a decade. In addition to our strong product offering, we believe our growth was spurred by a number of other factors, including warmer weather in the weeks leading up to Easter, the benefit of government stimulus, the easing of COVID-related restrictions, progress with vaccinations around the country, and the return of in-person learning. Better inventory management and improved price realization were also key contributors to our growth in the quarter. While we were pleased with our growth over 2020, it's also meaningful to note that we exceeded our first quarter 2019 sales and earnings performance as well. Moving to page five in our adjusted P&L for the first quarter. While net sales grew 20% over last year, gross profit dollars grew 72% in the quarter. a result of our gross margin rate expanding by nearly 1,500 basis points to 49.8%. While several factors contributed to this record gross margin in the quarter, the most meaningful were improved price realization, driven by the strength of our spring product offering and improved marketing and promotional effectiveness, and significantly lower inventory charges compared to last year's first quarter. Product costs were also lower versus last year. Royalty income was roughly comparable to last year at $7 million. Adjusted SG&A increased 3% to $271 million, which was a little lighter than we had planned. Some of this favorability will shift forward now and be spent over the balance of the year. SG&A levered 560 basis points to 34.4% of sales as a result of the strong sales growth in the quarter. The quarter included higher spending in a few areas, including investments in our retail and supply chain capabilities. and in furthering our ongoing productivity agenda. We also incurred higher compensation expense as we took steps a year ago to lower these expenses in response to the initial outlook for the business in the face of the pandemic. Adjusted operating income was $129 million compared to an adjusted loss of $26 million in the first quarter of last year. Adjusted operating margin was 16.3%, which was the best performance in a number of years, as we've noted. Below the line, net interest expense was $15 million, up from $8 million last year, due to the $500 million in senior notes we issued as we took steps in Q2 last year to strengthen our liquidity. We had a small foreign currency gain in the first quarter compared to a $5 million FX loss last year. Our effective tax rate was approximately 24%, up from about 14% in Q1 of last year. We're expecting our effective tax rate this year will be higher than last as a result of a higher proportion of our income being generated in the U.S. versus overseas, and our forecast for higher compensation expense, some portion of which will be non-deductible for tax purposes. On the bottom line, adjusted EPS was $1.98, up meaningfully compared to last year's adjusted loss per share of 81 cents. Moving to page six with some balance sheet and cash flow highlights. Our balance sheet and liquidity remained very strong. Total liquidity at the end of the first quarter was approximately $1.8 billion, with over $1 billion of cash on hand and essentially all of the borrowing capacity under our $750 million credit facility available to us. Quarter-end net inventories declined 1% to $561 million. On a gross basis, inventories were down 4% versus Q1 of last year. Inventories at the end of the quarter were in good shape, given the strong demand we have experienced and improved inventory management, which has included generally buying less inventory than in previous years. Over the past year, we've made good progress in reducing our excess inventory and selling through the inventory we packed and held in the early months of the pandemic. We'd actually like to have a bit more inventory right now. As Mike said, we're experiencing supply chain disruptions, which are delaying product receipts and ultimately shipments to our retail channels and wholesale customers. These disruptions to date have been mostly transportation-related. However, in recent weeks, we've begun to see some factory delays as COVID infections in a number of countries from which we source product, including Cambodia, Bangladesh, and India, have risen considerably. Accounts payable with higher year-over-year reflecting our working capital initiative, including the extension of vendor payment terms and rent deferrals implemented last spring in response to the pandemic. Long-term debt was approximately $1 billion, down about $200 million from last year. This decrease reflects lower revolver borrowings, which were offset in part by last year's issuance of the senior notes. Cash flow used in operations in the first quarter was $40 million. It's not unusual for our cash flow to be negative early in the year. This use of cash through the first quarter was substantially better than what we had planned, given our increased profitability in the first quarter. Lastly, given how well our business performed last year during the height of the pandemic, our strong start to 2021 and our outlook for continued strong liquidity, we are resuming our return of capital program. As we announced in today's press release, our board of directors has approved the resumption of our quarterly dividend at 40 cents per share, which will be paid at the end of May. We've had a long track record of returning capital to our shareholders. Resumption of our recurring dividend reflects our confidence in the outlook for the business and we will continue to evaluate additional opportunities to return capital, including shareable purchases, over time, particularly as our line of sight to the recovery of the broader marketplace improves. Turning to page 8 with a summary of our business segment performance in the first quarter, we achieved double-digit sales growth in all of our business segments, led by U.S. retail, with growth of 27%. We built on this strong sales growth with significantly improved profitability in each of our segments, Corporate expenses were higher year-over-year, principally due to higher provisions for compensation, which were significantly curtailed a year ago during the early days of the pandemic, and external consulting in support of our productivity initiatives. Now turning to page 9 with some detail on U.S. retail performance in the first quarter. Both stores and e-commerce net sales posted double-digit growth over last year. Given the significant store closures which began in mid-March last year, our usual total retail comparable sales metric is not meaningful this year. Our e-commerce business continued its momentum, building on last year's strong results, with total sales in this channel increasing over 38%. In the first quarter, we continued to see good momentum with our omnichannel offerings. Omnichannel-related sales increased over 100% compared to Q1 of last year. In the first quarter, 29% of e-commerce orders were fulfilled by our retail stores, either through onsite pickups or shipping to the customer directly from the store, up from 16% in last year's first quarter, and also up from the level of activity in the fourth quarter. During the first quarter, we closed 60 stores, which is part of our full-year plan to close approximately 115 stores over the course of 2021. Given the relatively low productivity of the stores slated for closure and with the benefit of a strong sales transfer rate, we expect these closures to be accretive to earnings and margin in 2021. The profitability of our U.S. retail business improved meaningfully in the first quarter with an adjusted operating margin of 18.7%, driven by higher gross margin as we improved price realization and had meaningfully lower charges for excess inventory. We levered the fixed cost of the business very well, given the strong increase in sales. Moving to page 10 with some highlights of recent marketing. At the start of the pandemic last year, we hosted a first-of-its-kind virtual baby shower for expectant moms with Kelly Clarkson. This event was a huge success, so we've made it an annual event. For this year's installment, we created the Dream Shower Giveaway event. We partnered with celebrity new mom Ashley Tisdale and other key partners, including Huggies, Sephora, BabyList, and SkipHop, to create special prize packages for participating moms-to-be. This year's event was also very successful, resulting in nearly triple the contest entries versus a year ago. We have some new product launches to share with you today. On pages 11 and 12, we're very excited about our Little Planet brand. The focus of Little Planet is on sustainability and is positioned as an accessible premium brand. Sustainability is a meaningful trend in the marketplace today. Consumers want to purchase products which demonstrate high integrity and a commitment to the environment. As such, Little Planet is also an initiative which is helping us to advance our overall ESG agenda as a company. We launched a new Little Planet experience on our website in March with a new tab dedicated to the brand. These products are mostly organic cotton and are broadly sustainable, including the packaging and hang tags which accompany the product. Little Planet assortment compliments our other brands in terms of its elevated aesthetic and fashion, while remaining very accessible in its value and price. These products are currently available on our website and at Target. We've had a tremendous response to our marketing efforts supporting Little Planet, including on social media. Early results have exceeded our expectations, and we've been chasing additional inventory in our best-selling styles to meet consumer demand. On page 13, Bold Basics is the branding we have applied to a subset of our existing products. We've created a new website experience for customers with a corresponding marketing campaign focused on these core knit everyday essentials in a range of optimistic colors. The product styles including everything from baby-footed PJs to pocket tees to easy knit dresses in simple stripes, solids, and dots. This initiative makes it easy for existing and new customers who are looking for these simple classic styles for their young children. Turning to page 14, our marketing has evolved to better address and support our broader age-up merchandising initiatives. This marketing has a very new and different look, feel, and voice, which is more appropriate to the older child and product it is intended to address. You'll see more of this tween squad-oriented marketing in the weeks and months to come as we build on the momentum of our older age segment products across our retail and wholesale channels. On page 15, we have some data which is familiar to many of you now. Our strong social media engagement with consumers continued in Q1 as we expanded our community of parents across key social media platforms, including Instagram, where Carter's and Oshkosh brands earned 71% of all engagement in the category. Moving to page 16 in our U.S. wholesale business, we saw good sales growth at wholesale with net sales increasing 12%. Our sales increase was driven by several components of the business, including exclusive brands, Skip Hop, and the Core Carters brand, which returned to growth in the quarter. Sales in wholesale were somewhat higher than we had planned as we experienced some earlier demand from certain customers, which helped offset the effect of delayed product receipts. We've seen outstanding replenishment demand from a number of our customers, especially for our Core Little Baby Basics product. Our wholesale customers are experiencing high demand for our brands from their consumers, particularly online, which has translated into improved sell-throughs and realized pricing. Profitability in the U.S. wholesale segment was also up meaningfully as a result of higher sales and improved product margins, lower inventory-related charges, and lower bad debt expense, which were partially offset by higher compensation provisions. Moving to page 17, performance of the Just One U brand at Target was very strong in the first quarter. One specific area of strength has been Joy Swimwear, which we've now expanded in infant and toddler sizes to all Target doors. Target customers have responded well to these products with their compelling combination of prints and patterns with great quality and value. We believe consumers are likely planning more vacations this year as the pandemic hopefully fades, providing good momentum in the sales of these products. At Walmart, sleepwear continues to be an area of strength, as it is in all of our exclusive brands. We are also seeing good momentum with the Child of Mine toddler business. Walmart customers have responded well to the value and style in our Child of Mine sets, in particular, in providing easy outfitting solutions. Moving to page 18, Simple Joys by Carter's is our brand exclusively sold via Amazon around the world. Overall sales growth at Simple Joys continues to be strong. We participate in a very interesting program with Amazon, their registry welcome box, which qualifying Prime members receive when signing up for Amazon's baby registry. We expect to ship over 1 million white bodysuits to Amazon in 2021. which means this number of new customers will be exposed to the SimpleJoy's brand as they prepare to become parents for the first time. Turning to page 19 and first quarter results for our international segment, international net sales grew 19% to $97 million. On a constant currency basis, segment net sales grew 15%. Canada was the largest contributor to our sales growth as this market increased 19% over last year. Online demand was particularly strong, with e-commerce sales up over 100%. While Canadian store sales declined in Q1 because of store closures in the first part of the quarter, we saw extremely strong consumer demand once the stores reopened in late February. Currently, we have approximately 100 stores which have closed again in Ontario and Quebec as authorities in these provinces have reimposed COVID lockdowns. We expect these stores will reopen by the end of May. In Mexico, our second largest international market after Canada, net sales grew 9% in the first quarter, driven by growth in both e-commerce and store sales. The balance of our international segment is comprised of wholesale relationships with over 40 partners and multinational retailers in approximately 90 countries around the world. First quarter net sales in this portion of the business increased 26%, driven by growth with Amazon and good demand for the Skip Hop brand outside of the United States. Adjusted international segment income was $10 million compared to a loss of $5 million last year. Adjusted segment margin improved to 10.2%, reflecting better price realization, lower inventory provisions, and expense leverage. On page 20, earlier this month we launched omnichannel capabilities in Canada, specifically buy online, ship to store, buy online, pick up in store, and curbside pick up options for consumers. We believe we're the only children's apparel retailer in Canada to offer these digitally-enabled omnichannel capabilities, which we believe will help us to strengthen our leading position in this important market. On page 21, we've included a photo of our first store in Kyiv. We've historically seen strong demand from Ukraine on our U.S. website, and we're optimistic about the growth potential for this market. On page 23, the number of questions we've received from investors on ESG topics has been increasing in recent years, so we wanted to provide a brief update on our ESG agenda. First, as shown here, we've summarized our core values. These are not new for us at Carter's. These exact statements have been in place for nearly a decade now. These values are prominently displayed in all of our offices and operational facilities, and even in those of some of our key suppliers and partners around the world. These values are important guideposts for us in how we run the company, and they're important to us as individuals as well. Importantly, these values are incorporated into our employee performance appraisal process, so all of our people are evaluated against how well they model and adhere to these values. Our focus on environmental issues continues to develop, and like many companies, we are in the earlier stages of developing more specific goals and objectives in this area. We work closely with our various suppliers and partners to understand their own programs and commitments in being good stewards of the environment. In social matters, we've expanded our dialogue with employees and consumers regarding the importance of diversity and inclusiveness and strive to ensure that our employees and business partners throughout the world are treated with the fairness, dignity, and respect that they are due. In the last year, Carter's has been recognized by Forbes across numerous dimensions, including being a great company for women and diversity overall. Finally, we've always prided ourselves in governance matters and how we've managed the company overall. Last year, we appointed an executive leader who has responsibility for all of our ESG activities. Responsibility was spread across several individuals previously, and this leader reports directly to Mike. We intend to publish our first-ever ESG report later this quarter, and we look forward to hearing your feedback. On page 24, we have an example of how we are working to reduce the environmental impacts of our products. We recently announced the launch of KidCycle, a first-of-its-kind program to recycle children's clothing. The intent of this pilot program is to provide families a sustainable option when it's time to part with their children's well-worn Carter's and Oshkosh clothing. The sustainability benefits of this program include reduced volumes headed for landfills and the conversion of donated items into products for further use, such as insulation. Moving to page 26 in our outlook for 2021, it is extremely challenging to forecast our business in this environment. By extension, providing guidance is also challenging, but we believe it's important to share what we think may be possible for our business over the balance of the year. There are numerous factors at work, perhaps with competing effects and uncertain impacts on our business. The late delivery of products continues to be an acute issue for us and many other retailers. We think it may take until the summer until we are more fully past this issue. These late deliveries have been accompanied by higher transportation costs across our various providers. In some cases, we are incurring unusual expenses to expedite some of our products from Asia to the United States. Much has been written about the projected decline in new births in the U.S. While we've not seen this have an impact on our business to date, we are mindful of the potential for this issue to become a near-term headwind for us. We're assuming a gradual recovery in store traffic trends across the balance of the year, but this will likely be heavily dependent on the status of COVID cases in various regions of the U.S., Canada, and Mexico, and ultimately consumers' confidence and comfort in returning to in-store shopping. As we have begun to work on our assortments for next year, we're beginning to see signs of inflation in product input costs, particularly those related to fabric. On the positive side, we're encouraged by consumers' response to our product assortments, which we think are the most compelling in the market in terms of their beauty, value, and quality, and the increasing effectiveness of our marketing and promotional programs. We're generally encouraged by the trend towards a greater proportion of the population being vaccinated and loosening restrictions on businesses and travel. Our recent experience reinforces the potential for a strong rebound in consumer demand as the pandemic winds down. At some point, there may even be something of a baby boom coming out of last year, which will also benefit our business. Certainly, we think back to school this fall will be a nice opportunity for us as more kids return to the classroom full time. There may be additional government stimulus put forth as we go forward, and the provisions enacted in the previous rounds related to child tax credits will start to benefit families starting this summer and will extend into early next year. All of this said, we expect 2021 will be a strong year of recovery from the pandemic. In projecting the year, comparability of each period to last year is clearly an issue. As we said on our last call, we expect the growth of sales and earnings to be higher in the first half of the year. There are a number of factors to note which will affect the comparison to last year's second half in particular. There's about $90 million of revenue at issue as a result of wholesale shipment timing and the impact of closing unproductive stores. Additionally, last year's 53rd week contributed just over $30 million of sales, which will not recur this year. Additionally, earnings growth in the second half will be affected by the items noted on page 27, which include the release of inventory reserves, last year, the restoration of compensation provisions, and an expected higher effective tax rate, given our forecast for more of our earnings to be generated here in the U.S. versus last year. Turning on the next page with specifics on our outlook for the year and the second quarter. Given our strong start to 2021, we have raised our sales and earnings outlook for the year. We're now planning net sales growth of approximately 10%, up from our prior view of 5%. Adjusted EPS is now forecasted to grow approximately 40%, up from growth of 10% previously, compared to adjusted EPS of $4.16 in 2020. This outlook for fiscal 2021 reflects our expectations for sales growth in all segments and gross margin expansion. We're targeting operating income of approximately $400 million, which would match our performance in 2019 and also represent good expansion in our adjusted operating margin over last year and 2019. Our 2021 outlook contemplates higher interest expense driven by the issuance of our senior notes last year and an effective tax rate of approximately 23.5%. For the second quarter, we're planning net sales growth of approximately 35%, with adjusted operating income expected to grow at about this same rate. Growth in adjusted EPS is expected to be approximately 25% versus last year, slightly lower than the growth in adjusted operating income due to the higher tax rate, which I've mentioned. This second quarter outlook reflects our expectations for strong sales growth in all business segments. We're planning gross margin expansion again in the second quarter, although at a level more modest than what we achieved in the first quarter, in part due to higher freight costs as we expedite deliveries in order to meet the strong demand we are experiencing. and the comparison to last year, which included the release of some inventory reserves. Our outlook also assumes higher SG&A, in part due to a full quarter of store expenses compared to the closures a year ago, as well as higher compensation expense, many components of which were reduced significantly a year ago. And with these remarks, we're ready to take your questions.