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spk02: 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 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 conference is being recorded. And now I'd like to turn the call over to Mr. Casey. Please go ahead, sir.
spk05: Thanks very much. Good morning, everyone. Thanks 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 had a very strong finish to the year. Sales and earnings were much better than we planned. Sales in the fourth quarter exceeded $1 billion, up 11% on a comparable week basis. The quarter got off to a strong start with high single-digit sales growth in October. It's been a perennial experience for us in years past. As weather changes with the seasons, it stimulates a need to shop for new outfits for children. The fourth quarter was one of our best holiday shopping periods. On a comparable week basis, we saw over 12% growth in the November-December sales period. Demand came early in November, driven by a stronger product offering, very effective marketing, and media reports encouraging consumers to shop early for the best selection. Recall in 2020 as we approached the Thanksgiving and Christmas holidays, we were told by medical experts not to gather with families and friends, not to travel to see parents and grandparents, to stay home and to stay safe. By comparison, as we prepared for Thanksgiving and Christmas last year, consumers were clearly more comfortable getting out to shop. Parking lots at shopping centers and airports were full again. And thankfully, more people reconnected with family and friends over the holidays. With those special holiday gatherings, children's outfits needed to be refreshed. And with the best-selling brand in kids' apparel, we saw over 10% growth in each of our baby sleepwear and playwear product offerings in the fourth quarter. Thankfully, our supply chain kept our stores in a good inventory position. The shelves were full with plenty of good choices for holiday shoppers. We also saw good growth in wholesale sales in the quarter despite late deliveries from Asia. As expected, earnings in the quarter reflected higher provisions for air freight, which helped us keep our largest wholesale customers in a better in-stock position over the holidays than would have otherwise been possible. We believe our investment in air freight enabled us to reduce our exposure to wholesale order cancellations due to late deliveries, and thankfully, Wholesale order cancellations in the quarter were much lower than we planned. More importantly, by expediting the receipt of inventory, we provided a much better experience for consumers shopping for our essential core products, including body suits, washcloths, bibs, towels, blankets, blanket sleepers, and pajamas, all the must-have products children need in those early years of life. Given our stronger than expected results, we increased our provisions for charitable donations and performance-based compensation. Our charitable donations are focused exclusively on helping families with young children, including early childhood education, families affected by job losses and natural disasters, and military families separated from a parent who is serving overseas. With respect to higher compensation provisions, earlier today, we announced to our colleagues throughout the world that they will be recognized and rewarded for the strong performance that they made possible for Carter's last year. In the weeks ahead, substantially all of our employees will receive a special bonus and an outsized matching contribution to their retirement savings plan. We've made similar investments in years past, and we continue to see a high return on our investment in people. Carter's continues to be rated as one of the best places to work, especially for diverse employees, women, and new college graduates. And our retention rates throughout the pandemic remained high. For the year, our sales were up 15%, reflecting a strong recovery from the worst of the pandemic-related disruption in 2020. Our sales last year were comparable to the sales we reported in 2019, and our earnings on those sales were 25% higher than 2019, driven by structural changes made to our business. Since the pandemic began, we focused our efforts on fewer, better, and higher margin sales. We reduced lower margin product choices, we closed over 100 low margin stores upon lease expiration, and we reduced off-price sales by over 50%. With leaner inventories, we reduced our low margin clearance sales by nearly $50 million. And we focused our marketing investments on brand building versus margin erosive promotions. Collectively, these margin driving strategies enabled us to achieve record profitability and profit margins in 2021. We believe the benefits realized from these structural changes are sustainable. We believe the fundamentals of our business have never been stronger, and we are committed to build on this higher level of earnings in the years ahead. A year ago, we shared our longer-term outlook for growth with you. In retrospect, that outlook was appropriately tempered given significant pandemic-related uncertainties at the time. Today, we know much more about how to deal with the virus and are gradually resuming the lives we enjoyed before the pandemic. COVID restrictions are lifting. Children are back in school. Stores are staying open. People are getting back to work. Wages are rising and weddings, many rescheduled more than once due to the pandemic, are expected to be at a near 40-year high this year. With a record level of weddings in the months ahead, new family formations hopefully will follow. Thankfully, the forecasts for a significant decrease in births last year were overstated. Recall that economists predicted as many as 300,000 to 500,000 fewer births due to the pandemic. The latest data suggests only 7,000 fewer births through September last year and a stabilization and increase in births beginning last summer. Carters has overcome a near 14-year decline in annual births in the United States. During that same time period, our sales and earnings have more than doubled. Baby apparel sales continued to be robust last year, up 8% in the fourth quarter, up 10% for the year. No other company in children's apparel has demonstrated our success developing brands for some of the world's largest retailers, including Target, Walmart, and Amazon. We are the largest supplier of young children's apparel to the largest retailers in North America. As we strengthened our wholesale business over the years, we also built the largest specialty retail store chain in North America exclusively focused on young children's apparel, and we built the most highly rated and profitable online platform focused on kids' apparel. We have an unparalleled multi-channel business model that provides multiple levers that have enabled us to achieve 31 consecutive years of sales growth before the pandemic. And through the pandemic last year, we achieved record profitability and profit margins. For generations, consumers have had a good experience shopping with Carter's. We have more than three times the share of our nearest competitor in baby apparel. Our relationship with consumers begins long before the child is born. Baby apparel is one of the first purchases made in those early months of pregnancy. Our long track record of success suggests consumers trust Carter's for their baby apparel purchases. And as their child grows, many stay with us and appreciate the high value our product offerings provide in those early years of life. Our total addressable market in the United States is over $30 billion. It's a highly fragmented market. and our share of the market is 70% larger than our nearest competitor. We own the largest share of the baby and toddler apparel markets, and we have successfully extended the range of our product offerings to outfit older children. Last year, we saw over 20% growth in our sales of apparel for children ages 4 to 10 years old. That segment of the market is larger than the baby and toddler markets combined. Nearly 90% of our retail sales are to families enrolled in our loyalty program. We have the highest rated loyalty program of any retailer of children's apparel. Data captured from those transactions and our credit card transactions enable us to better understand the age and gender of the child that consumers are shopping for. With that data, we're able to personalize our marketing to provide a better experience for consumers to drive traffic, and to increase the lifetime value of the relationship. We also leverage those insights to drive growth with our wholesale customers. Over the next five years, we're forecasting mid-single-digit sales growth in each of our wholesale and international segments and low single-digit sales growth in our retail segment. Our growth in retail is expected to be driven by high single-digit growth in our e-commerce sales. e-commerce continued to be our highest margin business this past year. It contributed nearly 40% of our total retail sales, up from 30% before the pandemic in 2019. Over the next five years, we expect e-commerce sales to grow to nearly 50% of our total retail sales. Our online capabilities have made it much easier for consumers to replenish their child's wardrobe as they grow through those early years of life. Together with our wholesale partners, the online sales of our brands grew to nearly $1.4 billion last year and nearly double versus 2019. Our stores will continue to be an important component of our brand experience. Over 60% of kids apparel in North America is purchased in stores. It's our highest source of new customer acquisition. When the pandemic began, we accelerated the closure of stores that had a low penetration of online shoppers using our stores for same day pickup or curbside pickup services that drive higher margin sales. Consumers who shop online and in our stores are our highest value customer. They spend three times more each year relative to the single channel customer. Collectively, the stores closed since 2019 had previously contributed nearly $90 million in sales with a low single-digit four-wall margin. By comparison, stores that we kept open collectively contributed over $1 billion in sales last year with a four-wall margin over 20%. By accelerating store closures, we reduced fixed costs and improved profitability. Today, over 98% of our stores are cash flow positive. We plan to open more stores than we will close this year. In the years ahead, we plan to continue improving the mix of our stores to achieve our sales and margin objectives. With skew rationalization, better inventory management, and improved price capabilities, our store unit economics have improved. Fewer stores need to be closed. and more profitable store opening opportunities are now available to us. We see an opportunity to open 100 or more stores in the United States over the next five years, net of store closures. Our wholesale segment is expected to be the second largest contributor to our sales growth over the next five years. Our wholesale customers view our brands as traffic drivers. Our product offerings complement their private label offerings. We expect to see the benefits of a good multi-year recovery in our more department store-like customers in the years ahead. We're expecting the largest growth in wholesale sales from our exclusive brands sold through Target, Walmart, and Amazon. Those retailers saw the biggest benefit in consumer traffic over the past two years. They offer one-stop shopping for families with young children, and we benefit from that frequent traffic for essential core products, including groceries, baby formula, and diapers. A high percentage of our wholesale sales are driven by our baby product offerings. These are high margin replenishment programs for our wholesale customers. We're now seeing increasing wholesale demand for our new Little Planet brand, which appeals to consumers focused on sustainability and organic product offerings. And as the market leader in toddler apparel, we're expanding our wholesale product offerings in the toddler and older age segments. With respect to our international segment, over 70% of our growth is planned to be driven by our operations in Canada and Mexico. We have the largest share of the children's apparel market in Canada, more than twice the share of our nearest competitor. In Canada, we have invested in omnichannel capabilities, including the same-day pickup and curbside pickup of online purchases. In the fourth quarter, over 30% of Canada's online purchases were picked up in our stores. These are our highest margin sales relative to shipping from our distribution center. In Mexico, we are executing the same strategy that served us well in Canada and the United States. We are converting all of our stores in Mexico to the more productive and more profitable co-branded model with the very best of our Carter's, Oshkosh, and Skip Hop brands. Like Canada, we built a multi-channel model in Mexico with e-commerce and wholesale distribution capabilities. Wholesale distribution is an important component of our international growth strategy. Our brands are sold in over 90 countries through wholesale relationships, including Amazon, Walmart, and Costco. Last year, our international e-commerce sales exceeded $100 million, more than double the pre-pandemic period. In the months ahead, we expect to work our way through the lingering effects of the pandemic, including supply chain delays and inflation. These are the two big challenges ahead of us this year. These challenges pale in comparison to the worst of the pandemic-related disruptions in 2020. We're currently seeing supply chain delays that are marginally better than we experienced in the fourth quarter. On average, we're seeing three to four week delays on less than 50% of our spring product offerings. Current production levels have improved relative to the fourth quarter. Our suppliers are reporting higher vaccination rates and attendance. The current delays are caused by port congestion, mostly on the West Coast. To mitigate the impact of transportation delays, we placed orders earlier and moved production schedules up this year. We've also routed more than 50% of our products through East Coast ports, including Savannah and Jacksonville, which has improved the speed of delivery and provides a hedge on potential disruption this summer as the ILWU and West Coast employers negotiate new labor contracts. With respect to inflation, costs will be higher this year. We now have visibility to second half product costs, which will be up high single digit. Transportation costs are also up, but will largely be offset by less air freight. We've raised prices high single digit this year to achieve our margin objectives. Thankfully, our wholesale customers have supported our price increases this year. To date, we have not seen any meaningful resistance from consumers to our price increases, which were up over a dollar per unit last year and planned up less than a dollar per unit this year. For years, our brands have been known for superior value. Children's apparel is a less discretionary purchase. Children rapidly outgrow their outfits in those early years of life. Children's apparel is a relatively small component of a family's budget on average, less than $60 per month per child. Relative to the higher spending categories like groceries and gasoline, we believe our price increases are modest in comparison. The path forward may be bumpy and recovery uneven, but the outlook for our business is very positive. Beautiful babies are born every day, and the number one brand their families purchase more so than any other brand is Carter's. Given the strong performance we achieved this past year, we are now forecasting sales to exceed $4 billion by 2026. Assuming continued benefits from the structural changes made to our business and success with our growth strategies, we are now forecasting earnings to exceed $12 per share by 2026. Over the past dozen years, we've returned nearly $2.5 billion in excess capital to our shareholders through dividends and share repurchases. Given our strong recovery from the pandemic and revised outlook for growth, Our board of directors recently declared a 25% increase in our quarterly dividend and authorized a $1 billion share repurchase plan, which we expect to execute over the next four years. Carters is beginning its 157th year in operation. Together with Oshkosh, Bogosh, and Skip Hop, we are a special part of a family's experience raising their children. We've invested in capabilities that enable Carter's to provide the best value and experience in young children's apparel. We believe we have a better understanding of consumers of children's apparel than any other retailer. No other company has the scope or depth of relationships with the largest retailers of young children's apparel and the ease of shopping online and in our stores. We're emerging from the pandemic a stronger and more profitable company. Our recovery was made possible by our 20,000 employees throughout the world who persevered through the historic health crisis. I'm grateful to every one of them for their passion for our brands and the success they continue to make possible for our company. With their support, Carter's best years are ahead of us. Richard will now walk us through the presentation on the website.
spk00: Thanks, Mike. Good morning, everyone. I'll begin on page two of our presentation materials with our GAAP P&L. Net sales grew 7% in the fourth quarter. Our reported operating income increased 3%, and reported EPS increased 2%. On page three, we had minimal non-GAAP adjustments in the fourth quarter. Adjustments for full fiscal years 2021 and 2020 are summarized here. In 2020, we had significant adjustments related to COVID, restructuring costs, and charges for intangible asset impairments. On the next page, we had a strong fourth quarter with sales and profitability that exceeded our prior forecasts. Sales grew 7% to over $1 billion, with each of our businesses, retail, wholesale, and international, growing over last year. When adjusting for the extra week in 2020, sales grew 11%. As anticipated, profitability was down in the quarter year-over-year, with adjusted operating income down 5% and adjusted EPS down 6%. I'll cover more of the drivers of fourth quarter performance in a moment. Our adjusted P&L for the fourth quarter is on page 5. I've mentioned the strong growth in sales. The gross margin was 46.4%, which was down 70 basis points from last year, but ahead of our plan for the quarter. We had strong demand and good sell-throughs during the quarter, particularly in our holiday product offerings, which enabled improved price realization in our U.S. retail businesses. Higher transportation costs, both air freight and increased ocean container rates, weighed on fourth quarter gross margin. SG&A was up about $34 million, or 10%. A portion of this was volume-related, corresponding to the strong sales growth in the quarter. Given our strong performance in the fourth quarter and for the full year, we made additional provisions for performance-based compensation to recognize our employees, and we also stepped up our charitable giving. Adjusted operating income was $138 million, representing a 13% adjusted operating margin in the quarter. On the bottom line, adjusted earnings per share were $2.31 compared to $2.46 last year. On the next couple of pages, we have some highlights of our full year performance. 2021 was a strong year for Carter's with meaningful progress in recovering from the pandemic disruption of 2020. On page six, full year net sales grew 15% to nearly $3.5 billion. On a comparable 52 week basis, sales grew 17%. Our profitability in 2021 increased to record levels. While profitability increased substantially over 2020, it's worth noting that 2021's operating income of $501 million represented a 25% increase over 2019's pre-pandemic performance. Importantly, we believe we've established a new base of earnings from which we intend to grow, going forward. Many of you know we've traditionally focused on our operating margin as an important metric and milepost of our progress in growing and improving our business. 14.4% represents a new record operating margin for Carter's, which places us in the top quartile of industry peers. On the next page, as Mike said, the pandemic spurred us to make fundamental changes in the way we run Carter's. Some of these changes are summarized on this page. Our improved profitability has been driven in part by our decisions to better focus our product offerings and store fleets. We've also improved our marketing to rely less on brand erosive promotions and message more on the strong relationships and unique emotional connections our brands have with consumers. As we move through the early days of the pandemic and now hopefully through its final stages, the resilience of our multi-channel business model and our organization has been made clear. Our task and commitment now is to build on the success of 2021. We also took important steps in 2021 to resume the return of capital to shareholders. We also made good progress in furthering our ESG agenda, including publishing our first ever corporate social responsibility report. On page eight, one of our real points of strength is our balance sheet. At year end, our liquidity was strong with significant cash on hand and virtually all of the capacity under our revolver available to us. Inventory was up about 8%, Overall, our inventory is in good shape and of high quality moving into the new year. About 42% of our quarter end inventory was in transit. We've also taken steps to take ownership of inventory earlier than we have historically, given the elevated transportation times. We had good cash flow in 2021. The decrease from 2020 reflects the normalization of vendor payment terms, which had been extended in the previous year in response to the pandemic. In 2021, we repurchased nearly $300 million of our shares, representing 3 million shares, or 7% of our shares outstanding as of the beginning of the year. As announced in our press release this morning, our Board of Directors has approved a meaningful increase to our quarterly dividend, an increase of 25% to 75 cents per share. I'll come back to the topic of capital allocation in a moment. On page 10, we've summarized our segment performance for the fourth quarter. As mentioned, all three segments contributed to our 7% sales growth. Retail sales increased 3%, wholesale by 9%, and international by nearly 25%. We saw improved profitability in retail and international. Profitability in wholesale was disproportionately affected by higher transportation costs, including air freight, as a result of the persistent supply chain delays across the business. The increase in corporate expenses was due to higher provisions for performance-based compensation and charitable giving. On page 11, we have some highlights of performance for each of our segments. In retail, we saw strong demand in the fourth quarter. Retail comps increased by 15%. Store traffic was meaningfully improved from last year's fourth quarter and was in line with our expectations. In e-commerce, we saw a significant improvement from third quarter's traffic trend. With strong product performance at higher gross margins, profitability in retail was very strong in the quarter, the highest in over 10 years. In wholesale, we saw strong demand with sales up 9%, which reflects in part the benefit of volume which moved into Q4 from the third quarter. We saw a nice recovery in the core Carter's brand in wholesale in the quarter. Product availability remained an issue throughout the quarter, and demand exceeded what we were able to ship because of the late arrival of product. As I mentioned, our spending on air freight and higher transportation costs weighed on the profitability of this part of the business. And in international, we saw very strong demand with sales up 25%. All of our businesses outside the United States experienced strong demand in the quarter, including Canada and Mexico, and we saw continued rebound of our margin-rich wholesale partners business around the world. This strong demand led to very strong profit performance in international, with segment operating income up nearly 50% over last year. On page 12, Forbes recently published its Halo 100 list. This list, based on direct consumer feedback, ranks companies which create brands that consumers love, brands which excel in customer satisfaction and experience, and which possess strong values and trust. Carter's is the only children's apparel brand to make the Halo 100. Since we are all about solutions for families with young children, we're pleased to see this recognition. On the next page, we also recently received some great recognition for our My Rewarding Moments loyalty program. We relaunched Rewarding Moments in August, better integrating our Carter's credit card and improving our personalization capabilities. Our customers clearly love our loyalty program since it's linked to about 90% of our store and online sales. Newsweek ranked our loyalty program as the number one baby and children's loyalty program, putting us ahead of a number of very well-known retail peers. Moving to page 14, as we've said, we continue to lean into the unique emotional connection the Carter's brand enjoys with consumers. In 2021, we launched the Carter's Made for This campaign, which acknowledges the rewarding challenges of becoming a new parent. Our presentation has a link to our latest video in this campaign. Our marketing team has also developed other very creative new ways of engaging with consumers. We recently launched the Carter's Baby of the Month promotion. We hear from parents all the time suggesting that we use their beautiful child in our marketing, and this campaign gives our customers a chance to have their baby selected for recognition and inclusion in our holiday seasonal advertising. To kick off 2022, we just launched a new event giving away 2022 baby announcement gifts which feature our Carter's original bodysuit. Our progress in marketing has resulted in consumers rating Carter's as the number one brand in terms of relevance, style, being trustworthy, and a brand they would recommend overall. On page 15, we have some of our latest marketing efforts related to the Oshkosh Bagash brand. Building on last year's Today is Someday campaign, Oshkosh is the first-ever kids apparel sponsor of Time and Nickelodeon's annual Kid of the Year event. Orion, featured on this cover of Time, is decked out in Oshkosh gear, as were the other children featured in this issue, and in the Kid of the Year TV special, which aired earlier this month on the Nickelodeon networks. 2021 was a great year for the Oshkosh brand, achieving record profitability. On page 16, we continue to be pleased with the traction of our Little Planet brand. The focus of this brand is sustainability, and Little Planet products are made with certified organic materials. These are important attributes to consumers. Just as important, they also love the unique look and aesthetic of these Little Planet products. We launched Little Planet as a baby brand, and based upon consumer feedback and demand, we are extending the brand to toddler sizes early this year. The distribution of the brand has been growing. It's available in our stores, on our website, and at certain of our wholesale customers. On page 17, 2021 was a record year for Skip Hop, achieving its best-ever top-line sales and earnings contribution. As parents spent more time at home during the pandemic, Skip Hop's durable products were must-haves. The Skip Hop team continues to approach its mission of innovation, introducing a number of new products, particularly in the playtime category. A great example of this is the 4-in-1 Toy Walker. The initial launch of this product sold out in less than two hours on skiphop.com. We're also seeing incredible traction for Skip Hop products, particularly home gear on the various registry sites frequented by new parents. On page 18, we have some imagery from our exclusive brands customers. At the left is our Just One You brand, featured in Target's spring marketing. In addition to Just One You, Target also carries Oshkosh and now Little Planet. In the center is a great piece from Walmart, highlighting the Child of Mine brand and Sleepwear, one of our authority categories. We've been investing more in marketing with Walmart to highlight our best products and to gain market share in-store and online. This spring, we will launch swimwear in infant and toddler, as well as events at Walmart, which are some of our leading product categories. Finally, our exclusive Simple Joys brand was prominently featured in Amazon's Cyber Monday promotions, along with other leading brands like Ray-Ban and Under Armour. Cyber Monday sales of Simple Joys doubled over the prior year, which was a real accomplishment given the surge in online demand in the fourth quarter last year. On page 19, as we've shared on past calls, Kohl's is one of our largest wholesale customers for the core Carter's brand. Kohl's team continues to pursue new and innovative ways to engage with its customers. At the left of the page, Carter's clothing was a part of a recent campaign with four leading mom lifestyle influencers on Instagram. Kohl's and Carter's have successfully used these influencer campaigns in attracting millennial parents. This particular event drove significant new customer traffic to Kohl's. And Kohl's has traditionally held a key baby promotional event in February, which drives significant traffic. Kohl's offers a broad assortment of the Carter's brand, and our products are prominently featured in its marketing for its baby sale. On the next page, our brands continue to have a very strong following on social media. In particular, Carter's leads among children's wear brands with its number of followers well above the other brands which we track. Marketing team continues to find new and innovative ways to interact with consumers on social media, including now on TikTok. On the following page, we've included a bit more information on our international business. In 2021, international represented 13% of our consolidated net sales. Sales in our international businesses rebounded strongly from the disruption of the pandemic and were up nearly 30% in 2021. We have a diversified multi-channel business model. In the Canada and Mexico markets, we own our businesses. In both of these countries, we acquired our former licensees. Canada has been a terrific success story for us. We hold the number one market share position. The majority of the business is direct-to-consumer with nearly 200 stores, and a well-established e-commerce business. Mexico is a newer business for us, also a multi-channel model with both wholesale and retail operations. Our team is doing a very good job building out this market where our brands have a strong consumer following. Several of our US-based wholesale customers have international operations, and our brands have presence in their overseas markets. Finally, we access many international markets through wholesale relationships with a number of partners, These partners have done a great job building our brands in their respective markets with beautiful stores and websites. This has been a high margin and capital light way to increase the penetration of our brands internationally. On page 22, we have photos of two new international stores. In Mexico, our team has been opening co-branded stores, which mirror our successful co-branded model here in the United States. We have 10 of these stores currently and see an opportunity to eventually have 75 locations over the next five years. While the store shown here is new, our business has about 40 legacy stores, which the team will convert over time to the highly productive co-branded model. On the bottom of the page, our partner, Riachuelo, has opened 26 Carter's branded stores in Brazil. We recently met with Riachuelo's management, and they confirmed that performance of the Carter's brand in Brazil has been very strong. Riachuelo is planning for significant growth in the Carter's brand in Brazil over the next several years, with a number of additional new Carter stores planned for 2022 in particular. Turning now to our objectives for the next several years, on page 24, we've summarized some of the attributes of Carter's which we believe differentiate us from others in the young children's apparel market and overall in the retail industry. We hold the largest share of the young children's apparel market. We view the category itself as attractive. Our products are less discretionary and have lower fashion risk, relative to other portions of the apparel industry. Our focus is on value with very affordable price points and a well-earned reputation for quality and trustworthiness. The company has a long track record of consistent performance with enviable profitability and cash flow. These qualities position us very well to continue to lead the market going forward. On the following page, there's a consistency to our focus as a company which has contributed to our success over the years. Our purpose, vision, and mission are listed here. Simply put, we support and provide solutions to those who are caring for the needs of young children. Our initiatives are organized around four strategic pillars, leading in e-commerce, winning in baby as our legacy and largest product category, aging up our product offerings to appeal to a broader addressable market, and expanding globally. On this call, we typically share what we think is possible with our business over the next several years, and these objectives are summarized on page 26. Our forecasts project we will reach over $4 billion in net sales by 2026, which represents a low single-digit compound annual growth rate. Through our margin improvement and productivity initiatives, we believe we can grow operating income at a mid-single-digit rate higher than the growth rate in sales. And with our plans to lower debt and continue share repurchases We're projecting that we can achieve high single-digit growth and earnings per share. There are a number of drivers which we believe will contribute to our planned growth. These are summarized here. The good news is there are a number of items on this list. We have lots of opportunities to grow and improve this business going forward. On the topic of capital allocation on page 27, as mentioned, one of the most attractive characteristics of our business is our strong cash generation. Over the past five years, we've generated nearly $2 billion of operating cash flow. Our forward forecasts project similar robust operating cash flow. We have a consistent record of returning excess capital, nearly $2.5 billion over the last dozen years or so. We are always looking for opportunities to put the cash which the business generates back to work. We continually evaluate high return organic investments and M&A opportunities. But as we see things today, we expect to generate significant free cash flow in the coming years. Absent another use for this cash flow, it's our intention to continue to return capital to shareholders. We're targeting $1 billion in share repurchases over the next four years, and we plan also to continue to grow dividends to our shareholders. Given our strong outlook for growth and liquidity, and with regard to our roughly $1 billion in outstanding debt, Since we hope that we are through the worst of the pandemic, it's our intention to call the $500 million in senior notes, which we issued in May of 2020. We had pursued this financing out of an abundance of caution in the early days of COVID in order to increase our liquidity and flexibility in those very uncertain days. Repaying these notes will lower our overall leverage and annual interest costs. Additionally, while the capital markets have been volatile recently, we plan to evaluate a potential refinancing of the remainder of our debt, That's something we will work on this spring, depending on market conditions, with the objective of pushing out the maturity of our debt by a number of years. Now for our outlook for 2022, beginning on page 28. We are expecting another good year, and despite obvious challenges in the marketplace, including COVID, supply chain delays, and inflation, we expect to build on our 2021 performance. We're planning full year net sales to grow 2% to 3% and adjusted operating income by 4% to 6%. Given our expected debt pay down and continued share of our purchases, we are forecasting adjusted earnings per share growth of 12% to 14%. We expect to generate a healthy amount of cash, which will facilitate continued investment in the business. With regard to the first quarter and first half on page 29, there are some comparability issues which we believe will affect first quarter performance. As we've said, some products continue to arrive late, and transportation and other costs remain elevated. We're also comparing to a record first quarter last year, which benefited from the significant government stimulus, particularly in the very high volume month of March. Easter was in early April last year, and it's a couple weeks later this year, which means we'll likely have less holiday-related volume in the later part of March than we did a year ago. Finally, our store closures last year will affect reported revenue in our retail segment. All that said, we're expecting net sales in the first quarter in the range of $740 to $750 million, with adjusted operating income of $85 to $90 million, and adjusted EPS of $1.25 to $1.35. It's important to note that even with the comparability issues I just summarized, first quarter profitability is expected to be up roughly 40 to 50% over what we achieved in the first quarter of 2019. We're expecting strong year-over-year growth in sales and earnings in the second quarter, which if we're successful with our forecast, would result in the first half performance summarized on the bottom of the page. Our first half expectations are for net sales in the range of $1,550,000,000 to $1,565,000,000, adjusted operating income of $195,000,000 to $205,000,000, and adjusted EPS in the range of $3.05 to $3.25. Here again, the improvements we've made across the business, we believe first half profitability will be up meaningfully, about 60% over our pre-pandemic 2019 first half performance. With these remarks, we're ready to take your questions.
spk02: Thank you. Ladies and gentlemen, if you have a question or comment, it is star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. Our first question comes from Chris Mardone with Bank of America. Your line is open. Please go ahead.
spk06: Thank you, guys, and good morning. Good morning. Relative to your fiscal 22 outlook, can you just discuss the cadence on when you're expecting the supply chain situation to improve and when your price increases will kick in? And in particular, if you can give us some cadence on the gross margin throughout the year, that would be very helpful. Thank you.
spk05: Good, Chris. So we're expecting gradual improvement through the year. What we're most encouraged by is the production levels in Asia are improving. This time last year, Many suppliers that we do business with had very low vaccination rates. Vaccination rates were probably less than 20% today. Cambodia, Vietnam, other major countries, for us, the vaccination rates are over 90%. The attendance rates are over 90%. So production levels are meaningfully better than they were last year. So we expect that that will continue to improve through the balance this year. The issue we have is the transportation delays for all the things that you've read about, particularly on the West Coast ports, but even recent articles would suggest things are improving on the West Coast. We're expecting gradual improvement. Maersk is one of our largest transportation providers. They reported recently they're expecting things will continue to be sluggish in the first half. Things will improve in the second half. Time will tell. Time will tell. I think we've worked our way through the worst of the pandemic. You know, we had, you know, transportation delays last year. I mean, 2020 was the worst of it. 21 was better than 20, and I think 22 this year will be better than last year. But I think it will be gradual improvement. Price increases, yes. Well, price increases every quarter this year. So we've taken our prices up for spring and fall product offerings and to – help us achieve our margin objectives. We've taken pricing up more than the cost increases are going up. And with respect to margin, the margin profile, Richard?
spk00: Yeah, I'd say, Chris, gross margin is expected to be a bit lower in the first half of the year and higher year over year in the second half. There's a couple of factors affecting that. The impact of store closures is more pronounced in the first half of the year, so retail will be a bigger part of our mix in the second half. So that's the gross margin-rich part of the business. Also, the impact of higher transportation costs, specifically air freight, was more localized to the second half of last year, so that pressure moderates and should benefit gross margin in the second half.
spk05: Yeah. Even on the first quarter, we're taking some of the product that late fall deliveries are In the fourth quarter last year, the cancellation rate in the fourth quarter was about half of what we thought it would be, but it wasn't zero. So some of the late fall arriving product, you can't keep moving fall to the right, so we'll clear out the residual of the fall product offering that came in late in the first quarter. So off-price sales will be a bit elevated, still relatively small as a percentage of total sales, but in 2021, off-price sales were like less than 1% of our total sales. total sales, and they'll be closer, they'll be probably less than 2% in the first quarter, but they will be elevated year over year in the first quarter, just to clear out whatever was left of the fall product offering from last year.
spk08: Got it. Thank you.
spk07: You're welcome.
spk02: We'll go next to Paulo Edras at Citi. Your line is open. Please go ahead.
spk04: Hey guys, it's Kelly Crago on for Paul. Thanks for taking your question. Just curious if you could parse out for us what's happening in the wholesale business. U.S. wholesale sales beat expectations in the fourth quarter, but for the year we're still down about 7% relative to 2019 levels. So just curious what's driving that. It seems like even department stores at this point are feeling more optimistic about their businesses. So just curious what's happening there and how we should think about the wholesale business in F-22.
spk01: Yes, Kelly. We feel good about wholesale. I think, you know, compared to 2019, it's down about $70, $75 million. Really two reasons for that. One is we did meaningfully less off-price sales last year, better inventory management with the team. So that was about half of it. And then the rest was we really reduced our exposure to troubled retailers. There's folks that we did business with before we do less, and some of them have gone out of business. So those are really the two main reasons. But our outlook for 22 is very good. We expect good demand this year. Full year sales are planned up about mid-single digits. I think our forecasts show we're going to have growth with six of our top seven accounts. And, you know, as Mike has said, price increases all the way through fall that are received well by our wholesale customers. And we would expect that our operating margins even return closer to that pre-pandemic level. So it should be a good year. Off-price sales are going to be comparable, I think, to last year's lower run level. replenishment businesses have been good. That's about a third of our business now, which makes it more predictable. And then we're working hard to improve the service levels caused by transportation delays that Mike articulated. So overall, we feel good about the wholesale business.
spk05: Yeah, wholesale is a much healthier business today than it was in 2019. A lot of retailers had leaned forward on inventories, heavy with inventories in 2019. What they learned, just like we learned during the pandemic, you can run with a lot less inventory, leaner on inventory. And when you're leaner on inventory, you're driving a higher margin business. So it's a much healthier wholesale business than it was in 2019. Got it.
spk04: Good to hear there. And then just our second question, could you help us understand how you're thinking about the first quarter? I mean, you did give us some detail there, but the sales down mid-Singleton, I think, is worse than we were expecting. So what are you seeing in the business currently and Are you seeing that sort of trend so far in the first quarter? How did it look in January as you went up against the smaller stimulus? And if you're not, you know, seeing the business down as much as you're guiding to, just curious what you're assuming for March given that's when stimulus played a big role in the business last year.
spk05: Yeah, just a few things, Kelly, just to be aware. First quarter is the smallest part of our year. And stimulus did help. You had nearly $2 trillion poured into the economy in the first quarter last year. And that got the register ringing. We were right next to the fancy Phipps Mall right next door to us here in Atlanta. And I remember going over in April, you had lines 20 deep trying to get into Tiffany and Gucci. Not quite sure we needed anything from Gucci, but the lines where I never saw anything quite like it. So they had all this money get poured into the economy. So that helped us, and good, because a lot of it was focused on families with young children. We benefited from that. What I'd point you to for the first quarter, our profits in the first quarter this year are playing up 50% relative to the first quarter of 2019. So again, our business is fundamentally stronger, more profitable. And so I don't worry too much about first quarter trends. I would say January had a very strong fourth quarter. January, we say, was a little softer because I think the Omicron, when we came back from the holidays, most of our colleagues got, someone in their family got wiped out from Omicron. So we saw some of a dip in our business at the tail end of last year and then in January. February was a bell ringer. February was particularly good. President's Day weekend was very, very good for us. But January and February are relatively small compared to what's ahead of us. will be the largest month in the context of sales in the first half of this year. As we get closer to March, the weather starts to turn. More parts of the country warm up. Families start to change the wardrobes out for the more warmer weather gear. You get a little closer to Easter. Easter is a little later this year. I'm told it's like two weeks later. It might have been the first week of April last year, and you benefit from that when it's the first week of Easter in the first quarter. We won't get that benefit this year, but we'll get it in the second quarter. By the time we update you again at the end of April, Easter will be behind us. Weather will have turned in more parts of the country. We'll have better visibility on how product is flowing from Asia, consumer receptivity to the price increases. So it's early. By the time we update you next time, we'll have more of a sense for how the year is getting underway.
spk04: Got it. Best of luck. Thank you.
spk05: Thanks, Kelly.
spk02: We'll go next to Susan Anderson with B. Riley. Your line is open. Please go ahead.
spk03: Hi, good morning. Thanks for all the details today. I was curious just on the long-term goals. It looks like maybe the biggest change is just on the operating margin line. Maybe if you could talk about the buckets that have changed versus, I guess, your goal of 13% pre-COVID and the biggest drivers of kind of moving that up. And then also on the top line, it looks like you're expecting wholesale to grow mid-single digit versus retail low single digit. So just curious what's driving that greater wholesale growth, if it's space gains or other dynamics going on. Thanks.
spk05: Sure. So as Richard shared with you, we're projecting $4 billion in sales now by 2026. We've raised that outlook relative to what we shared with you a year ago. We're projecting mid-single-digit growth in our wholesale and international sales, low single in the retail. As it relates to retail, it's largely going to be driven by e-commerce. I'll use round numbers here, Susan, but we're projecting over a half a billion dollars growth in sales. Over $200 million of that will come from retail sales. largely driven by e-commerce. But half of the growth in e-commerce will be supported by our stores, what we call omni-channel sales. That's where people have the benefit of shopping at home and love the convenience of swinging by our stores to pick up the product at one of the stores located close to their home. And then in wholesale, projecting over $200 million in growth, and that's largely driven by the exclusive brands. That's where people are shopping. So during the pandemic, there was a disruption. More people started shopping at Target, Walmart, Amazon. And we benefited from that, and we expect we'll continue to benefit from that. And then international, projecting over $100 million of growth. 70% of that growth in international will be driven by Canada and Mexico, the balance from multinational retailers, Costco, Walmart, Amazon, and then smaller international relationships. Individually small, those other retailers, but collectively a margin-rich business. On the earnings... projecting over $600 million in operating income, projecting margin expansion in wholesale and international. Keep in mind, we got clobbered in wholesale margins last year because we airlifted as much product as we thought would be helpful to them, particularly in the baby components of our product offering. Those are the essential core products. We wanted to make sure families shopping at Walmart and Target particularly had a good experience shopping with those wholesale customers. And so we won't have that level of air freight this year. We don't expect it going forward. It's just highly abnormal, well over $30 million last year. It'll be a fraction of that this year. And we're projecting margin expansion in international. Again, this is a very margin-rich business for us. We manage the operations in Canada and Mexico. Amazon is going to be a nice source of growth for us in the years ahead. That's a good margin business for us. And we're planning to maintain the margins in retail. That's our current model assumptions. We'll continue to take some of the outperformance that we're seeing in earnings and reinvest it in the brand experience, in the store experience, the online experience, the digital experience for consumers. We're seeing great progress with our app, our mobile app, so a highly rated mobile app. So good work has gone into that to connect in a more effective way with consumers. The margin, just going forward, we're going to have a higher mix of e-commerce sales, That's our highest margin business. We're going to have fewer low margin stores. We're going to continue to open stores that have a margin, a rich margin, over 20% margin. We'll close the low single-digit margin stores. We're going to continue to focus on SKU optimization. That was a big margin driver during the pandemic. We'll run leaner on inventories. We're seeing great progress improving price realization. We're expecting the sourcing efficiencies increasing. will improve as we move through this year. And as Richard shared with you, we're going to have lower interest costs because we plan on paying back that pandemic-related financing, borrowed a half a billion dollars. Thankfully, we didn't need it. And then we'll get the benefit from the share repurchase plan we're announcing this morning.
spk03: Great. That's really helpful. And then if I could just add one follow-up. Did you guys say what AUR was for 2021 versus, I guess, unit growth?
spk05: Sure. We have that close by. So for the year, for 21, the pricing was up 8, and the units were up about 7, 15 for the year.
spk03: Great. That's really helpful. Thanks so much, you guys. Good luck this year.
spk05: Thanks very much, Susan.
spk02: Our next question comes from Jim Cartier at Monash Cresty Hearts. Your line is open. Please go ahead.
spk07: Good morning. Thanks for taking my question. I'm curious what you're seeing from a promotional activity in the market. Have you seen any promotions returning? And then, you know, what's your assumption for retail promotions in 2022?
spk01: I would say, Jim, that the market continues to be less promotional throughout 21 as people were, you know, people were chasing to get the goods in and demand was really good. We walked back, as we've said many times, we walked back ineffective promotions and the couponing and have really focused on driving price realization and you know, improving our brand and emotional content versus highly promotional. So I would say the market overall was less promotional. We expect it to be the same going forward here. Everybody's dealing with transportation delays, and there's been, you know, significant inflation with some of the input costs. So I think every good retailer is going to try to get paid more for their goods.
spk07: Great. And then just kind of following up on the previous question about wholesale growth, you know, I guess how far out into the future – Are you planning with your key wholesale accounts? Are you looking at two, three-plus years to do that visibility to make single-digit growth?
spk05: We have our five-year plans, and it's based on input from our wholesale customers. So we have good multi-year growth plans for our key wholesale customers.
spk07: Great. And then finally, can you just talk about Mexico? How big is that business today? And then remind us what you see as the ultimate market opportunity there.
spk00: Well, it's about a little over $50 million in revenue today, Jim, and we're looking to basically double the store business. So over the next five years, we'd expect to be a much more significant contributor.
spk06: Great. Thank you.
spk00: You're welcome.
spk02: And our final question will come from Jay Sol with UBS. Your line is open. Please go ahead.
spk08: Great. Thank you so much. My question is just on the first quarter guidance. You know, how much is the later Easter this year being in the middle of April versus early April last year impacting your guide? Let's just start with that one.
spk00: I'd estimate it to $10 million to $15 million of volume that's shifting, Jay.
spk08: Okay. And then I guess just in terms of, you know, you talked a little bit about off-price. On the five-year, the 2026 objectives, you know, how do you see that business trending, you know, within the guidance of mid-single-digit U.S. wholesale growth? I mean, do you see off-price becoming a smaller percentage of the total business and, you know, actually shrinking, or do you see it sort of growing at the level that you've got it to for U.S. wholesale?
spk05: It'll shrink as a percentage of sales over the next five years.
spk08: And, like, is it possible to quantify that? Like, is it going to go from, like, a certain percentage so you can see what it's going to be?
spk05: Yeah. Jay, I would just say the thing that it's less than 2% of our total consolidated sales today, and it will be less than that five years from now.
spk08: Got it. Okay. Super helpful. Thank you so much.
spk05: You're welcome, Jay.
spk02: And now I'd like to turn the conference back to Mr. Casey for any additional or closing remarks.
spk05: Okay, well, thanks very much. Thank you all for joining us today. We enjoyed our time together. Look forward to updating you again on our progress in April. Goodbye.
spk02: Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect now and have a great day.
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