Carter's, Inc.

Welcome to Carter's third quarter fiscal 2022 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 Chief Operating Officer, and Sean McHugh, Vice President and Treasurer. After today's prepared remarks, we will take questions as time allows. Carter. issued its third quarter fiscal 2022 earnings press release earlier this morning. A copy of the release and presentation materials for today's call have been posted on the investor relations section of the company's website at ircarters.com. Before we begin, let me remind you that statements made on this conference call and in the company's presentation materials about the company's outlook Plans and future performance are forward-looking statements. Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual 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 measures. A reconciliation of these non-GAAP financial measures to the GAAP financial measures 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 call over to Mr. Casey.

Thanks very much. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I'd like to share some thoughts on our business with you. For the final weeks of what's been a more challenging year than we had forecasted, we expected to build on the strong recovery and record earnings that we achieved last year. 2022 got off to a strong start. We saw high single-digit comparable sales growth through the early months of this year, but in the second quarter, we began to see the effects of historic inflation weighing on consumers and demand for our brands. Like many retailers, Carter's expected a good multi-year recovery from the pandemic. We knew that year-over-year comparisons would be impacted by the nearly $3 trillion of government stimulus last year, and we considered that in our growth plans. What we did not expect were the adverse effects of the absence of that stimulus this year, combined with a surge in gas prices, food prices, and interest rates. Carter's primary target consumers are women and men in their late 20s and early 30s. This is typically the time in their lives when many marriages occur and family formation often begins shortly thereafter. These women and men are earlier in their careers, just starting out together and working hard to make ends meet. Our target consumer's household income is about $75,000 a year. This segment of the population has been particularly hard hit by inflation. The Federal Reserve has been raising interest rates aggressively to lower inflation. In the third quarter, Federal Reserve Chairman Powell said that the higher interest rates would bring, in his words, some pain to households and businesses. We've seen some of that pain reflected in our sales this year. A recent Wall Street Journal survey of economists indicates a high probability of a recession in the next 12 months. In past recessions, Carter's weathered those downturns reasonably well. Children's apparel is a less discretionary product category. Children rapidly outgrow their outfits in the early years of life, which drives frequent shopping visits by their parents and grandparents. Thankfully, year to date, we continue to see the relative strength in our baby product offerings In the United States, baby apparel contributed about 56% of our year-to-date apparel sales. Our baby apparel sales year-to-date are down about 2.5%. Our total apparel sales are down about 5%. The latest birth data through March is encouraging. It was the fourth consecutive quarterly increase in births in the United States. It's a noteworthy reversal of what has been a nearly 14-year decline in annual births since the peak in births in 2007. During the pandemic, many weddings were rescheduled to protect families and friends from COVID. With a nearly 40-year high in weddings forecasted this year, the recent and positive trend in births may continue in the years ahead. Our third quarter sales were over $800 million, our largest quarterly sales so far this year, but about 5% lower than we expected. Third quarter earnings were in line with the guidance we shared with you in July. We saw mid-teen operating margins in each of our retail, wholesale, and international segments. By apparel market standards, Carter's is a margin-rich business. Our US retail segment was the largest contributor to our third quarter sales and in line with the forecast we shared with you in July. Our monthly comparable retail sales began trending down about 10% in May and we saw that trend continue in July and August. September sales slowed with mid-teen negative comps weighed down in part by the hurricanes that impacted Florida and heat waves on the West Coast. These are two of our largest markets. Comparable retail sales for the third quarter were down 11% and currently trending down about 13% fourth quarter to date. We saw the market for children's apparel become more promotional in the third quarter as warmer weather lingered longer in many parts of the United States. We achieved our retail price objectives in the third quarter and were less promotional than last year. we had a better mix in level of inventories and less clearance inventory. And as a result, our retail price realization improved about 8% in the quarter, which covered comparable product cost increases. To date, we've seen no meaningful resistance to our retail pricing, which was up less than $1 per unit compared to last year. Our pricing team tested lower price points in the quarter to see if they would drive better outcomes, and they didn't. Our average price points, inclusive of many multi-pack configurations for bodysuits, pajamas, and playwear, are less than $11, which we believe is a compelling value proposition. That said, we saw consumers pulling back on units purchased relative to last year, which may reflect lower real wages this year due to inflation. E-commerce continues to be our highest margin business. E-commerce penetration in the third quarter was about 35% of our retail sales, a couple points lower than last year. We're seeing lower demand from international guests shopping on our U.S. websites, which we attribute in part to the stronger dollar and reduction in promotions that attracted them in years past. Interestingly, we've seen a benefit in our stores from improved tourism. Our border and tourist store locations had the best comparable sales in the third quarter and are running positive comps year-to-date. That improvement may be attributed to the relaxation of COVID restrictions since last year and the pent-up demand to travel again. With our progress improving price realization, more attractive store opening opportunities are available to us and fewer stores may need to be closed. We're on track to open about 30 stores this year in the United States, including 20 in the fourth quarter. In recent weeks, we achieved a new milestone in omnichannel sales. We saw up to 40% of our online transactions supported by our stores. Consumers increasingly enjoy the convenience of shopping online and picking up their purchase in our stores. These omnichannel customers are our highest value customers and spend three times more each year than our single channel customers. In the United States, about 70% of children's apparel continues to be purchased in stores. We have a very profitable store model. 98% of our stores are cash flow positive, and we continue to see a good return on our investment in new stores. We plan to open 100 or more stores over the next five years, net of store closures. Since 2019, we have closed over 100 low margin stores, reducing our U.S. retail sales by over $100 million and improving retail profitability by over $10 million. We expect that our outlet stores will be a smaller percentage of our store portfolio in the years ahead. With the surge in gas prices this past year, our outlet store sales have been trending lower than our strip center and mall stores located closer to densely populated areas. Our marketing team is focused on leveraging the strength of our loyalty and private label credit card programs to better serve our customers and improve profitability. Carter's has the highest rated loyalty program in children's apparel. Over 90% of our active customers are enrolled in our Rewarding Moments loyalty program. Our private label credit card holders surpassed 1 million customers this year. These are more frequent shoppers and the related transaction fees are lower, so these are margin accretive sales. Our private label credit card has grown to be one of the most frequent cards used by our customers, about 17% of our retail sales, and it's expected to grow in the years ahead. The data from our loyalty and credit card programs enables our marketing team to better understand the consumer's needs, such as the age and gender of the child, so we can personalize and improve the effectiveness of our marketing and increase the lifetime value of the relationship. Since 2019, we've improved the profitability of our retail segment by focusing on fewer better product choices, rationalizing low margin SKUs, closing low margin stores, reducing the mix of clearance sales through better inventory management and improving price realization with fewer and better promotions. Year-to-date through September, our retail segment profitability is up over 30% compared to 2019. The recent trend in our retail sales suggests a slower start to holiday shopping than we experienced last year. Recall that a year ago, consumers were encouraged to shop early for the best selection given supply chain delays and inventory shortages, and they did shop early. A year ago, many consumers were benefiting from the access to vaccines and stimulus payments to help families with young children recover from the pandemic. Last year at this time, it was a period of optimism as many prepared to reconnect with families and friends to celebrate the holidays in the post-pandemic period. Our fourth quarter comparable sales last year grew over 15%. It was one of our strongest holiday seasons ever. By comparison, this year families with young children are weighed down by historic inflation and the uncertainty of when things will improve. Our experience this year suggests consumers may be buying what is needed, when it is needed, and not shopping as early as they did last year. For the year, we expect our US retail sales may be down about 11%, with comparable sales down 10%. That said, the holiday shopping period has historically been good for Carter's. Christmas pajamas and special occasion dressing are typically some of our best sellers in the final months of the year. With cooler weather arriving in more parts of the country together with a better mix in level of inventories and assuming continued success with price realization, it's possible that the current trend in sales may improve in the final weeks of the year. In our U.S. wholesale segment, we had sales growth with five of our top seven wholesale customers in the third quarter, but the growth was below our expectations. Our exclusive brands continue to be the strongest component of our wholesale segment, with sales growth up 5% in the third quarter and up 10% year to date. Many of our wholesale customers brought inventory in several weeks earlier this year to mitigate the risk of supply chain delays. We believe those decisions were made well before demand slowed earlier this year. With the slowdown in the economy, some of our wholesale customers are running higher than desired inventory levels. In the third quarter, we saw our wholesale customers curtail inventory commitments, including replenishment orders, to achieve their inventory objectives. Our wholesale sales in the quarter were also affected by delays in shipping caused by port delays on the East Coast. We had expected to ship our fall product offerings about 80% on time in the quarter. Our actual shipping was about 70% on time, with the balance running a few weeks late on average. We experienced higher cancellations due to those late shipments, which is understandable given fewer weeks remaining to sell through those fall product offerings. For the year, we expect wholesale sales may be down about 7%, which reflects lower replenishment trends and the risk of shipping delays and order cancellations in the fourth quarter. We're assuming growth with our exclusive brands and lower sales in our core carters and skip hop brands. Our new sustainable little planet brand for babies and toddlers is growing ahead of plan with our wholesale customers. Little Planet is one of our more innovative launches in recent years utilizing organic cotton and recycled materials to provide a beautiful, affordable premium and sustainable product offering for families with young children. Little Planet is sold through Target, Kohl's, Amazon, BabyList, and BuyBuyBaby, as well as through our retail and international segments. In total, we expect sales from our new Little Planet brand to more than double this year. And we expect to see the distribution of Little Planet expand to more doors in 2023. We're hopeful Amazon's recent Prime Day is a bellwether for holiday shopping this year. Our Simple Joys brand had one of its best performances during Amazon's signature marketing event, with sales in the two-day period more than three times our average weekly sales. From our perspective, Amazon's recent Prime Day was highly successful. As you may know, Carter's is the largest supplier of young children's apparel to the largest retailers in North America. No other company has built the scope, depth, or success of wholesale distribution that Carter's has achieved for decades, which has enabled us to reach more consumers than any other apparel company serving the needs of families with young children and has enabled us to weather more challenging economic periods. Increasingly, Our wholesale sales are concentrated with fewer, better, more financially viable retailers, which may serve us well in the years ahead. Our international segment contributed 15% of our consolidated third quarter sales. Our operations in Canada and Mexico drove over 75% of our international sales, with Canada the largest contributor. We believe inflation Combined with the late arrival of cooler weather weighed on Canada's third quarter performance. Gas prices in Canada have increased to over $7 a gallon this year. Sales in Canada trended similar to our retail segment in the United States, down 11% in the quarter. All other components of our international business were in line with our expectations. For the year, we are forecasting international sales down about 4%, largely due to sales trends in Canada, and we're forecasting good high single-digit growth in Mexico given their progress opening co-branded stores. Our international business is a multi-channel model with retail, wholesale, and licensing operations. In our wholesale operations, We have about 40 partners operating smaller retail chains and e-commerce platforms in nearly 100 countries. Collectively, these smaller retailers contribute over 15% of our international sales, and it is a margin accretive business. My comments on the balance of the year reflect the high end of our guidance. Given the unusual and higher level of uncertainty on consumer demand during the upcoming holidays and our progress getting product through the ports and to our wholesale customers, we've widened the guidance range more than we typically would given only two months to go. This is the first holiday shopping season in over 40 years that consumers are weighed down by record inflation. Our objective in sharing guidance with you today is to reflect the current market conditions and what we believe is now possible. Our success for many years has been driven by focusing on essential core products, body suits, washcloths, blankets, bibs, blanket sleepers, pajamas, and playwear. These are consumer staples. Families with young children purchase in multiple quantities on a frequent basis, in those early years of their child's life. Our range of wholesale distribution is from Walmart to Macy's. We believe our brands appeal to the masses. Our Carter's brand has the largest share of young children's apparel, more than 70% share than our nearest competitor. Our brands are sold in nearly 20,000 store locations in North America and on the most successful websites for young children's apparel. Together with our wholesale customers, the online retail sales of our brands this year are expected to be about $1.2 billion. As history has shown, with time, inflation will subside. We believe the post-pandemic recovery we all began to experience last year will resume. The recovery has been disrupted and delayed by inflation. Like many disruptions to our business in years past, The financial crisis in 2007, the great recession that followed, the cotton crisis in 2011, and the pandemic. Carter's weathered those storms and emerged stronger from them. In 2020, the most disruptive year of the pandemic, Carter's retained a higher percentage of profitability than most in our peer group. A year later in 2021, we recovered and achieved a record level of profitability. Prior to the pandemic, Carter's achieved 31 consecutive years of sales growth. Last year, we reported over $500 million in adjusted operating income, inclusive of extraordinary provisions for air freight, incentive compensation, special compensation and retirement benefits to all employees, and higher charitable contributions. Our challenge now? is to work our way back to that higher level of profitability, which we are committed to do in the years ahead. To mitigate the impact on earnings from the near-term market conditions, we plan to reduce inventory purchases in 2023, work our pack and hold inventories down profitably, and stay lean on discretionary spending in all components of our business where possible. We plan to continue investing in our e-commerce capabilities, customer acquisition, our stores, which are the number one source of new customer acquisition, brand marketing, and our distribution capabilities to enable a good recovery from the current market challenges. We expect product costs and transportation costs will remain elevated in the first half of next year, then improve in the second half. In the balance of this year, we plan to firm up our forecast for 2023, and we'll share them with you early next year. I want to thank all of our employees throughout the world who have supported Carter's through the volatile market conditions and challenges over the past two years. With their continued support, I believe Carter's best years are ahead of us. Richard will now walk you through the presentation on our website.

Thank you, Mike. Good morning, everyone. Beginning on pages two and three of our materials, we've included our GAAP P&Ls for the third quarter and the year-to-date periods. As summarized on page four, we had no adjustments to our GAAP results in the third quarter, and only minor adjustments in the third quarter last year. For the year-to-date period this year, we had charges related to the early repayment of debt, and last year we had unusual charges related to COVID, restructuring costs, and our store closing initiative. This information is included for your reference, and I'll speak to our results on an adjusted basis this morning. On page five, we've summarized our sales and profit performance in the third quarter. Our net sales declined 8% to $819 million. These results were below what we had expected by about 5%, but reflective of the overall market right now. Our US and Canadian retail businesses represented the majority of our sales decline versus last year, a result of lower consumer demand throughout the quarter. Our profitability was within the range we had guided to previously. We had operating income of $92 million in the third quarter. a double-digit operating margin, and adjusted EPS of $1.67. Our year-to-date performance is summarized on page 6. Given the disruption that record inflation has caused to consumer demand and to our cost structure, our sales and profitability are down versus 2021. Recall that 2021 was a year of record profitability for Carter's. Given the uncertainty in the market at the moment, especially related to the level and consistency of demand, our focus is on profitability, which has always been a differentiating characteristic of our company. To provide a little more color on our performance in the quarter, I'll turn to our adjusted P&L on page 7. On the $819 million in net sales in the quarter, our gross profit was just over $370 million, representing a gross margin rate of 45.3%. The decline in gross profit versus last year was overwhelmingly driven by lower sales, which represented $33 million of the overall $38 million decline in gross profit. Gross margin was down 60 basis points, close to last year's record gross margin rate. We had significant favorability in the quarter from not repeating about $15 million of air freight, which was incurred last year to expedite delayed product. Unfortunately, this benefit was offset by a largely identical increase in transportation costs, from higher ocean container rates. As the worldwide economy has begun to slow, we're seeing indications that costs are moderating, and we might see some relief on these elevated transportation costs beginning next year. The balance of the change in our gross margin rate was largely mix-related, with a higher proportion of U.S. wholesale sales which carry a lower gross margin than sales in our U.S. and Canadian retail businesses. Importantly, we continued our progress in improving price realization across the business in the quarter largely offsetting higher product costs. Our spending in the quarter was well controlled, down 2% compared to last year. We had lower spending in a number of variable spending categories corresponding to the lower level of sales in the quarter and provisions for performance-based compensation, which were lower than a year ago. Freight and distribution costs were up year over year. Given the backlog at the East Coast ports, higher market transportation and logistic costs and just our overall higher level of inventory, we've been spending more on logistics and distribution-related expenses. The congestion at the ports, both West Coast and East Coast, continues to lessen. As these improvements continue and as we work down our inventory level, I would expect that our distribution and freight costs will improve from their current level. All of this nets down to operating income in the quarter of $92 million, representing an operating margin of 11.2%. Below the line, we continue to benefit from lower interest costs. A year ago, we had $500 million of pandemic-related financing outstanding. We retired that debt earlier this year. Our effective tax rate was just under 20% in the quarter compared to 21.6% last year. We're expecting a lower percentage of our profitability to be generated in the US compared to our very strong performance last year. This has the effect of driving down our effective tax rate. We're expecting a full year effective tax rate for 2022 of about 22%, down about 50 basis points from last year. This decrease is, again, largely driven by a lower projected mix of earnings to be generated in the US this year. We've also completed a meaningful amount of share repurchases this year, which has lowered our average outstanding share count. So on the bottom line, adjusted earnings per share were $1.67 compared to $1.93 a year ago. Our adjusted P&L for the first nine months of the year is included on page 8 for your reference. Our year-to-date adjusted operating margin was 11.7% compared to 15% in 2021. This decline was principally driven by fixed cost deleverage on lower sales and higher freight expense. On page 9, we summarized some highlights of our balance sheet and cash flow. Overall, our balance sheet is in fine shape. In this environment, having a strong balance sheet such as ours is a key advantage. We have substantial liquidity, roughly $730 million with cash on hand, and the majority of our $850 million revolving credit facility available to us. In the last year, we deleveraged our balance sheet meaningfully, and we believe we have significant flexibility, including additional borrowing capacity should we desire it, to manage our operations and to grow our company over the coming years. Our Q3 ending inventory was nearly $900 million, up about 24%. Inventories were about $20 million or 2% higher than we had forecasted, largely a result of lower wholesale sales in the quarter. And I'll speak more about inventory in a moment. Our year-to-date cash flow is lower than last year, largely a result of lower earnings and the increase in inventory. Given the seasonality of our business, we expect to generate significant operating cash flow in the fourth quarter. At the high end of our guidance range, this would imply full-year operating cash flow in the range of $40 to $50 million. Cash flow is a priority for us. As demand and inventory levels normalize, we would expect that the business will return to its historical pattern of significant cash flow generation, which is another long-time and differentiating characteristic of Carter's. We continue to return capital to shareholders in the third quarter, and this is summarized at the bottom of page 9. In addition to paying $90 million in dividends, we've completed over $240 million in share repurchases through the third quarter, representing about 7% of our shares, which were outstanding as of the beginning of the year. Regarding inventory, we have some additional information on page 10. Our inventory at the end of the third quarter was $899 million, up 24% versus this time last year, and as I said, slightly above where we had planned to be. Excluding pack-and-hold inventory, our inventory increase over last year was about 13%, driven by earlier receipts and higher product costs. Given the disruptions in the supply chain throughout 2021 and the strength of our business last year, we took action to bring in product earlier than historically, which has contributed to the increase in our inventory. The amount of in-transit inventory remains high, about 28% of our inventory. This is above historical levels, although improved versus last year as a proportion of our total inventory. Given the dramatic slowdown in demand, which began earlier this year, we've also taken action to better align inventory with the demand we're seeing in the market. In total, we've made decisions affecting roughly $175 million of inventory commitments for 2022 and 2023. These include reducing or canceling planned production and packing and holding certain products to sell profitably in future seasons. Our priority is to maximize the return on our investment in inventory. Given the nature of our product, which we view as fairly timeless and less reliant on fashion, we're not planning to liquidate inventory at deep discounts. Our pack and hold inventory balance at the end of the third quarter was about $100 million and was comprised largely of fall-winter 2022 product, which we expect to sell in 2023. Recall that in 2020, we packed and held over $100 million of inventory, which we subsequently sold through profitably in 2021. It's our objective to achieve this same favorable result with the 2022 product, which we've now earmarked for sale next year. Finally, product costs are higher, which is additive to our inventory balance. Product costs for the first half of next year are expected to be up in the high single-digit range, consistent with what we're seeing in the second half of this year, with costs likely moderating in the second half of 2023. Right now, we're projecting year-end net inventories to be approximately $775 to $800 or an increase of 20% to 25% over last year. Excluding pack and hold, our projected year end increase in inventory is expected to be between 10% and 15%. Beginning on page 12, we have some additional details on third quarter performance. Overall, our operating margin declined from 13.9% to 11.2%, principally due to lower sales and expense due leverage. These effects were most pronounced in our U.S. retail and international segments given the high fixed cost structure of our direct consumer businesses. Turning to page 13 and some additional color on each of our businesses and their performance in the third quarter. In our U.S. retail segment sales decreased 12% and this was in line with our plans. We believe our core consumer has pulled back their shopping activity overall including for our products as a result of the higher inflation which they're experiencing in virtually every aspect of their lives right now. Total comparable sales declined 11% with lower sales in both our stores and e-commerce channels. Our retail comps were pressured by lower store and website traffic as well as lower units per transaction. A bright spot in the quarter was our continued progress in improving realized pricing with average unit retails up high single digits versus last year in line with our plan. Retail's operating margin was 14.1% compared to 18.7% last year. This decline was principally due to spending deleverage from lower sales. Higher product and freight costs offset the benefits of improved price realization and lower provisions for performance-based compensation. In our U.S. wholesale business, sales were down 2% versus a year ago. Collectively, sales of our exclusive Carter's brands grew 5% in the third quarter, and as Mike said, we're up 10% year-to-date through the third quarter. The presence of our brands with these retailers has been very important, with their businesses offering thousands of store locations and their websites garnering millions of visitors. Replenishment demand slowed during the quarter as customers realigned their inventory levels to better match the lower demand trend occurring across the industry right now. In some cases, wholesale customers are executing broad-based reductions of inventory levels regardless of product category or current performance. Supply chain delays also affected our Q3 wholesale performance, contributing to higher order cancellations and some planned demand shifting out of Q3 into the fourth quarter. U.S. wholesale's operating margin improved 20 basis points to 13.9%. Better pricing, lower spending on air freight, and lower compensation expenses were mostly offset by higher product costs, higher ocean freight rates, and distribution expenses. We incurred about $7 million in one-time distribution expense in the third quarter relating to transitioning product, primarily Skip Hop, from a high-cost third-party distribution facility in California to a lower-cost facility in our Georgia distribution network. International sales declined 7% in the third quarter. On a constant currency basis, sales declined 5%, representing about a $3 million headwind from the stronger U.S. dollar. Two of the more significant components of our international business, Canada and Mexico. Sales in Canada were down for the reasons that we've discussed. Our business in Mexico delivered double-digit sales growth in the third quarter driven by the strong performance in the direct-to-consumer part of the business. International segment operating margin was 14% in the quarter compared to 17.4% a year ago. The decline reflects better price realization and lower performance-based compensation which were more than offset by a lower mix of high margin e-commerce sales in Canada and higher ocean freight rates. Turning now to some of our marketing initiatives, beginning on page 14, Mike shared a lot of good information on our Little Planet brand. In his remarks, we believe that in less than two years, Little Planet, which is our newest brand, has become one of the largest and most successful organic and sustainable children's clothing brands in the market. Demand for Little Planet products has been strong this year, even in the face of consumers becoming increasingly price conscious. Little Planet products are priced higher than the equivalent Carter's products, but Little Planet is positioned to represent an accessible premium brand. We've expanded Little Planet's distribution to over 750 doors, largely driven by a growing presence across our own stores, Target, and Kohl's. We've recently broadened the Little Planet assortment to include outerwear made from recycled materials launching just in time for colder fall weather. This year, we will again offer Little Planet family holiday pajamas in organic cotton after a strong performance in last year's holiday season. Pages 15 and 16 showcase our branding initiatives at Target and Walmart, two of our important Carter's exclusive brand wholesale customers. During Q3, we rolled out improved branding for both Just One You at Target and Child of Mine at Walmart. This branding is in place both in stores and online and increases the prominence of the Carter's brand, which is the number one brand in young children's apparel in North America. These branding initiatives are good examples of how we use the creativity of our organization and our ability to invest behind our brands with our most significant wholesale customers. On page 17, Carter's exclusive brand for Amazon, Simple Joys, enjoyed prominent placement in Amazon's Early Access Prime event earlier in October. This two-day event was one of our most successful events to date. We're very pleased with the successful early launch to the holiday selling season for Simple Joys. As Mike commented, our Simple Joy sales during this important Amazon promotion were a multiple of our typical weekly volume. Turning to page 18, as we told you on our last call, we've launched a partnership with Hilary Duff, an actress and millennial mom of three children who enjoys an incredible following. Our association with Hilary has generated a good deal of excitement so far. As part of this brand marketing campaign, which is focused on acquiring new customers, we launched the first of two baby collections developed in partnership with Hillary. This product is available on our website and in-store. On this slide, we show some of the great in-store brand marketing to showcase this collaboration. Our second baby collection developed in collaboration with Hillary Depp will launch in spring 2023. Moving to page 19, retail stores are an important component of our plans to build a larger, more profitable direct-to-consumer business over time. Mike shared a number of the reasons why we're bullish on our stores, including the role stores play in customer acquisition and their contribution to creating compelling omni-channel experiences for our customers. Given the strong financial return of our new stores and the availability of attractive real estate, we're evaluating additional store opening opportunities above those currently planned. Turning to page 20, earlier this month we launched our holiday marketing. As you can see on this page, we continue to highlight the beauty of our assortment and the breadth of our holiday offerings, from baby's first Christmas to matching PJs for the whole family. We've digitally enabled our holiday gift guide for 2022. This printed guide card will reach consumers' homes next week. It contains a QR code allowing instant online access to our full holiday assortment. as opposed to past holiday mailers, this year's holiday gift guide is a good example of how we are engaging with our customers in a more modern and digital way. Moving to page 21, our leadership position across social media remains strong. We're seeing continued growth across our community building efforts, especially on TikTok. The next generation of parents are highly engaged with social media, and these channels will help us foster connection and trust as this group moves into parenthood. Turning to page 22 with some additional highlights on our business in Mexico. Pictured here is a new co-branded store which opened recently in north central Mexico. We're planning to open 12 new stores this year, including six in the fourth quarter. We're opening these stores primarily in high traffic malls in the largest cities across Mexico. Consumers have responded very well to the broader assortment offered in these stores relative to the smaller boutique format stores we've historically operated in this market. Over the next five years, we plan to triple our retail square footage in Mexico. Turning now to our outlook for the balance of the year on page 24, as Mike said, the industry's outlook for the fourth quarter and the holiday shopping season is not as strong as we experienced last year. Consumer demand may very well remain under pressure as inflation is unlikely to moderate meaningfully by the end of the year. We're focused on what we can control in this environment. We're maintaining our disciplines around pricing and promotion. We're working to manage our inventory position, and our objective is to stay lean. We're scrutinizing every aspect of discretionary spending across the business while also planning ahead so we're best positioned for when the market eventually recovers. While supply chain performance has clearly improved, especially over a year ago, challenges remain. Product continues to arrive later than scheduled, increasing the possibility of wholesale customer order cancellations. And higher freight and distribution costs continue to weigh on our P&L. In spite of these challenges, there are a number of positives as we move through the balance of the year. Our product assortments and holiday marketing plans are compelling. Our inventory position is meaningfully improved over last year, both in quantity and composition. We're well positioned to support consumer demand over the holidays. We remain focused on profitability, which is supported by our progress in price realization and good control of spending across the organization. Our Q4 earnings per share are also expected to benefit from lower interest expense and the cumulative benefit of our year-to-date share repurchase activity. In terms of our specific objectives for the fourth quarter on page 25, given our third quarter performance and current market conditions, we've lowered our outlook for the fourth quarter relative to our previous guidance. We now expect fourth quarter net sales in the range of $845 to $885 million, which assumes U.S. retail comps down in the range of 10% to 15% and lower U.S. wholesale sales, reflecting the risk of lower demand and supply chain delays. And we're assuming lower international sales, largely driven by lower projected demand in Canada and from our international wholesale customers. In terms of profitability, we expect Q4 adjusted operating income in the range of $85 to $115 million and adjusted EPS in the range of $1.40 to $2. If we're successful with our fourth quarter plans, full year 2022 net sales would be in the range of roughly $3.1 to $3.2 billion, adjusted operating income in the range of $355 to $385 million, and adjusted EPS in the range of $6.05 to $6.65. Our teams are focused on delivering the strongest fourth quarter possible. Our company has a history of weathering difficult market conditions, and we expect we will continue to do so in this current challenging environment. And with those remarks, we're ready to take your questions.