Carter's, Inc.

Welcome to Carter's first quarter fiscal 2023 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's issued his first quarter fiscal 2023 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 ir.carters.com. Before we begin, let me remind you that statements made on this conference call and in the company's presentation materials about the company's outlook plans and future performance are forward-looking statements. Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual 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 those non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, today's call is being recorded. And now I'd like to turn the 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. Carter's is off to a much better start this year than we planned. we exceeded our sales and earnings objectives in the first quarter. We saw earlier than expected demand in our wholesale segment, and we were able to support that earlier demand with the best on-time deliveries from Asia we've seen since the pandemic began. Our retail and international sales in the first quarter were in line with our expectations. Inventories are now lower than last year, which drove a significant increase in cash flow in the quarter. Thankfully, the impact of historic inflation is moderating. Product costs and ocean freight rates are trending lower. We expect to see the benefit of those lower costs beginning later this year and the full benefit next year. SG&A in the first quarter was lower and better than planned. We've reduced discretionary spending and staffing levels to mitigate the slowdown in consumer demand that began last year. Birth trends in the United States are stable and the outlook for births is improving. Our baby apparel continued to be our best performing product offering and contributed over 60% of our first quarter apparel sales. Given the better than expected performance in the first quarter and our latest forecasts, we are reaffirming our outlook for sales and earnings this year. Our retail segment was the largest contributor to our sales in the first quarter. Comparable sales were down 13% and in line with our expectations. Our store sales were better than expected. Our e-commerce sales were a few points lower than planned and in line with market trends. Our baby apparel outperformed our spring sleepwear and playwear product offerings. Spring selling has been slow to turn on, we believe in part due to cooler weather. An earlier Easter usually bodes well for first quarter sales if the holiday coincides with spring-like weather. We didn't see that combined benefit of an early Easter and warmer weather this year. Our best performance in retail sales was in Florida and the Mid-Atlantic region. We saw lower than average comps in New England and our Great Lakes region. Our best performing stores were in indoor malls. We saw weaker comps in open-air outlet centers. In terms of trends, we achieved positive comps in January. Trends slowed in February, then trended lower in March and April. Year-to-date, comparable retail sales are down about 15%. In the weeks ahead, we expect warmer weather will arrive in more parts of the country. The turn to warmer weather has historically provided a good stimulus to our sales. In the first quarter, we achieved a mid single digit price increase in our retail segment, which fully offset product cost increases. It continued to be a very promotional environment as some of our competitors were working down excess inventories and trying to jumpstart spring selling. We believe we were leaner on prior season inventories than some of our specialty competitors and therefore less promotional in the first quarter. That said, our market analysis suggests we were competitive on in-season products. We continued to test lower prices on some key product offerings in the first quarter. Those lower prices did not drive the desired results. In those tests, most consumers bought the same number of units at lower prices. Our improvement in price realization over the past few years has largely been driven by better inventory management. Since the pandemic began, we've reduced low margin product choices, we increased the mix of longer life cycle products, which are less likely to be marked down, and we've bought fewer units to improve sell-throughs and to reduce the mix of low margin clearance sales. In our store visits, Our store associates tell us they see no meaningful resistance to our price increases. We believe we offer a superior experience and value in young children's apparel. We have good sales offered every day of the year. Given our progress with SKU rationalization, inventory management, and price realization in recent years, our store unit economics have improved and more attractive store opening opportunities are available to us. Nearly 70% of children's apparel is purchased in stores. We believe our stores provide the very best presentation of our brands and are our highest source of new customer acquisition. And when we open stores, we also see a lift in our high margin e-commerce sales. We plan to open over 50 stores in the United States this year and plan to close about 10 stores upon lease expiration. Our store openings are focused on high traffic centers that provide convenience for online shoppers and enable the same day pickup of digital purchases. Consumers who shop online and in our stores are our highest value customers. They shop more frequently with us and spend three times more each year than our single channel customers. Carter's is the largest specialty retailer focused on young children's apparel in the United States, with nearly 800 beautiful stores from Maine to Hawaii. We plan to have 1,000 or more stores in the United States by 2027. We also have the highest rated online platform for young children's apparel. For the year, we are forecasting our retail sales down about 7%. That's a point lower than our previous guidance to reflect a slower start to spring sales. Collectively, our new stores are expected to contribute about $40 million in sales this year. Our e-commerce penetration is forecasted to be 34% of our total retail sales this year compared to 37% last year. We believe the lower mix of e-commerce sales reflects consumers shifting back to store visits in the post-pandemic period. We view the consumers shifting back to stores positively given the high fixed cost structure of that channel. Our wholesale segment was the second largest contributor to our first quarter sales. Our wholesale sales were better than planned due to more favorable replenishment trends and earlier demand for our exclusive brands. As planned, our wholesale sales in the quarter were lower than last year. The decrease in first quarter wholesale sales reflects a nearly 30% decrease in sales to off-price retailers, lower sales to department stores, the suspension of sales to buy-by-baby, and to a lesser extent, lower sales to club retailers. With leaner inventories, we have less need to sell our brands through low-margin, off-price retailers this year. We continue to believe our business trends will improve as we move through the balance of this year. This time last year, our wholesale customers were moving orders up. Like Carter's, they expected another good year of growth in the post-pandemic period. By ordering several weeks early last year, our wholesale customers wanted to reduce the risk of port congestion and related delays getting our new product to the floor. But by late spring, it became clear that historic inflation was weighing on consumer demand. In the second quarter last year, our largest wholesale customers began to reset expectations for growth given the significant and unexpected slowdown in consumer demand. In the first half last year, our wholesale customers were building inventories. In the second half last year, they were aggressively reducing inventory commitments. Inventory corrections included the suspension of automatic replenishment systems in the second half last year. Collectively, our wholesale customers' efforts to correct inventory levels were successful. They entered this year leaner and cleaner with our brands with less prior season carryover products. In recent meetings with our largest wholesale customers, there is a consistent theme expressed in their outlook for this year. It's one of caution and conservatism in forecasting consumer demand. With the expected continuation of interest rate hikes and possibility of a recession, we believe it's prudent to be conservative in forecasting sales this year. Given our planning cycle, our wholesale customers have now fully booked our seasonal product offerings through winter 2023. Seasonal demand represents about two-thirds of our annual wholesale forecast. The balance is driven by automatic replenishment of essential core products for baby apparel. Those products include consumer staples such as bodysuits, washcloths, towels, bibs, blankets, and one-piece dressing we call sleep and play. Given the multiple outfit changes in growth in the early months of a child's life, The demand for these products drives traffic and frequent purchases. Last year, we sold nearly 25 bodysuits for every child born in the United States. Automatic replenishment systems ensure these items stay in stock. It's the equivalent of bread, milk, and eggs at the grocery store. With leaner inventories, our wholesale customers' replenishment systems have now been fully reactivated. Replenishment trends exceeded our first quarter plan and continue to trend higher than last year through April. Replenishment demand is expected to be better in the second half this year as we comp up against the destocking efforts by our wholesale customers in the second half last year. We are the largest supplier of young children's apparel to the largest retailers in North America. No other company in Young Children's Apparel has the depth or success of relationships Carter's has developed with the winning retailers. Every major retailer has a private label brand which complements our brands. Our Carter's brand has 80% more share than the largest private label brand. One of our best performing exclusive brands sits side by side with the market's best performing private label brand. On average, our brands are priced a dollar or two above private label brands. In inflationary markets, we're mindful of the risk of consumers trading down to lower price brands. We believe private labels' performance in recent years is less about trading down and driven more by where consumers are shopping. They're consolidating trips given higher gas prices and seeking the convenience of one-stop shopping for groceries and other essential products. In recent years, Carter's has benefited from increased traffic to Target, Walmart, and Amazon. Our strong brand presence with each of those winning retailers is a competitive advantage. No other company in children's apparel has our broad market presence. For the year, we're forecasting wholesale sales down about 9%. Over 50% of that decrease reflects the suspension of shipments to buy-by-baby and lower sales to off-price retailers. The balance of the decrease reflects lower sales to department stores and other retailers. Our exclusive brands are expected to contribute over 52% of our wholesale sales this year, up from less than 50% last year. Going forward, we expect that more of our wholesale sales will be driven by fewer, larger, and more successful retailers of young children's apparel. Our international sales were a bit better than planned in the first quarter. Our sales in Canada, Mexico, and Brazil contributed over 80% of our international sales in the quarter. As expected, our sales in Canada were lower in the first quarter. Like the United States, we've seen consumer demand slow in Canada as inflation ramped up last year. Over 80% of our sales in Canada in the quarter were direct to consumer. we saw a mid single digit decrease in comparable sales in Canada in the first quarter. With weather turning warmer in Canada in recent weeks, comparable sales have turned positive second quarter to date. We saw double digit sales growth in Mexico in the first quarter. Mexico is replicating the success we've experienced in Canada and the United States with our co-branded stores. Since acquiring our licensee in Mexico in 2017, we have opened 25 highly productive co-branded stores. We currently have over 50 stores in Mexico and envision 100 or more stores in that market in the years ahead. Our wholesale partner in Brazil, Riachuela, has opened over 50 Carter stores in recent years, expanding the distribution of our Carter's brand beyond their 260 department store locations. Our international expansion efforts are focused on Latin America, the Middle East, and Europe through wholesale relationships, including Amazon International. For the year, we are forecasting international sales to be comparable to last year. We're assuming growth in Mexico and Brazil, which is expected to offset lower sales in Canada and other markets. Our brands are supported by nearly 40 wholesale relationships with retailers, representing our brands in over 90 countries and about 100 online platforms outside of North America. A bright spot in the first quarter was our supply chain performance. Collectively, the improved trend in on-time receipts from Asia, the speed of moving our products through the U.S. ports, and a favorable trend in product and ocean freight rates may be a bellwether of a return to better market conditions in the years ahead. We began to see the benefit of on-time shipping performance in the fourth quarter last year with earlier than planned wholesale demand for our new spring product offerings. Given leaner inventories heading into this year, we saw earlier than planned wholesale demand for each of our brands in the first quarter, which was supported by excellent execution by our supply chain team. Historic inflation in ocean freight rates negatively impacted our earnings last year by over $50 million. We are in the final stages of negotiating new ocean freight rates at favorable pre-pandemic levels. The new rates will go into effect beginning in the second half this year. We are expecting a meaningful increase in cash flow this year driven by a reduction in inventories. We began the year with nearly $100 million of inventories packed and held following the slowdown in consumer demand and inventory corrections last year. By the end of this year, we expect that inventory will be fully sold through our wholesale customers and direct to consumers at desired margins. We have confirmed orders for the pack and hold inventories from our wholesale customers. None of the inventory is expected to be sold to the off-price channel. In summary, 2023 is off to a better start than planned. We expect our sales and earnings trends to improve as we move through the balance of the year. Year-over-year comparisons become less challenging in the second half. A year ago, the lives of families with young children were disrupted by historic inflation and other global events. That said, we believe consumers are resilient and adjusting to the higher cost of living. We believe aggressive actions by the Federal Reserve have slowed consumer demand and lowered inflation. With time, we expect inflation will moderate to desired levels, consumer confidence will recover, and market conditions will improve. Until then, we plan to strengthen our product offerings, forecast demand conservatively, stay lean on inventory commitments, and reduce discretionary spending. We plan to focus on margin preservation and cash flow, fully invest in our growth strategies, and be well positioned to benefit from the market recovery in the years ahead. In the context of Carter's 158-year history, inflationary and recessionary cycles are relatively short-lived. Down cycles in retail come and go. Thankfully, one constant we've experienced for generations is that beautiful babies are born every day and the number one brand their families choose more so than any other apparel brand for their child is Carter's. I want to thank all of our employees for a stronger than planned start to the new year and for their commitment to strengthen our performance in the balance of the year. At this time, Richard will walk us through the presentation on our website.

Thank you, Mike. Good morning, everyone. Beginning on page two of our presentation materials, we've included our GAAP P&L for the first quarter. Page three highlights a net adjustment to our GAAP results in the first quarter related to organizational restructuring. This information is included for your reference. This morning I will speak to our results on an adjusted basis, which excludes this $1 million net charge. On page four, we have some overall metrics for our performance in the first quarter. Net sales were $696 million, a decline of 11% versus last year. Sales exceeded our previous guidance due to stronger than planned demand in our U.S. wholesale business. First quarter sales in our U.S. retail and international segments were largely on plan. We believe demand throughout the marketplace remains muted as inflation, high interest rates, increasing consumer debt loads, and overall weak consumer confidence continue to weigh on consumer spending. The decline in profitability versus last year tracks to the decrease in sales with adjusted operating income of $58 million in the first quarter and adjusted EPS of 98 cents. Operating income and adjusted EPS were better than we had planned for the first quarter, the result of the earlier than planned sales in our U.S. wholesale segment. Page 5 recaps our first quarter performance relative to our previous guidance. Sales were a little more than $40 million above the high end of our guidance range. Retail comps were down 13%, right in the middle of the range we had forecasted. And wholesale sales declined 9%, which was far less than we had planned, given the shift of demand into Q1 from Q2. And international sales were on plan. Our upside in sales was driven by earlier than planned demand in our U.S. wholesale segment, specifically for our Exclusive Brands product. Our supply chain has done excellent work in putting us in position to support demand from our wholesale customers. Our on-time delivery in wholesale was 97% in the first quarter compared to about 60% last year when product was delayed because of significant congestion at the ports. We saw higher than planned demand for both seasonal and replenishment product in wholesale. We've estimated that approximately $35 million of first quarter sales represented demand which had been planned for the second quarter. As such, these higher sales are largely timing related and right now we're not considering them as upside to our full year outlook. Our profitability was also above the high end of our guidance, driven by the outperformance in wholesale sales in the quarter. Moving to page six, we have our P&L for the first quarter. On net sales of $696 million, we had a gross margin rate of 44.5%, which was a decline of 90 basis points from last year. We had previously forecasted some expansion in gross margin in the first quarter. Relative to this previous forecast, we had substantially more wholesale sales in the quarter than planned. a result of the timing shift I've mentioned. Additionally, much of the higher demand was driven by our exclusive brand customers. These wholesale and exclusive brand sales carry lower gross margin rates than other parts of our business, but are very profitable and margin accretive on an operating income basis. Year over year, gross margin benefited from spending less on air freight than in the first quarter of 2022. This benefit, though, was offset by continued higher ocean container rates some higher costs related to excess inventory and the mixed impact of higher wholesale and exclusive brand sales. We're encouraged by what we're seeing in the market regarding ocean freight rates. After a period of significant inflation across the industry, we expect meaningful relief in these costs beginning later this year. Our U.S. retail business had continued success in improving realized pricing in the first quarter and improvement in the mid-single-digit range. although a bit less than we had planned as Q1 sales of new spring product at higher margins were lower than anticipated. Spending was well controlled in the quarter, down modestly compared to last year. Variable spending, such as for distribution, outbound freight, and fulfillment, was lower, corresponding to the lower level of top line sales, as was spending on marketing and performance-based compensation. We saw some higher costs in the quarter related to bad debt, technology spending, and higher store costs in Mexico. as we've continued to grow our store base in that market. Adjusted operating income in the quarter was $58 million, representing an adjusted operating margin of 8.3%, which was better than we had planned. First quarter operating income last year was $103 million at a 13.1% operating margin. Below the line, interest and other expenses were $5 million lower than 2022. principally due to the retirement of $500 million of pandemic-related senior notes in the second quarter last year. Our effective tax rate was 24.5% in the quarter compared to 23.1% in the prior year. We plan for a higher effective tax rate in 2023 as we expect more of our earnings to be generated in the U.S. and to have greater non-deductible compensation costs. Our weighted average share count was lower by about 3 million shares versus last year, driven by the significant amount of share repurchases we completed last year. On the bottom line, adjusted diluted earnings per share were 98 cents compared to $1.66 in the prior year. On page 7, we summarized some highlights of our balance sheet and cash flow. Our balance sheet is in very good shape. Total liquidity was over $900 million, a combination of a good level of cash on hand and significant capacity available under our revolving credit facility. Q1 ending inventory was $614 million, down about 10% year over year. Our inventory position at the end of the first quarter is lower than we had planned, which is a result of the acceleration of wholesale demand into the first quarter. Our pack and hold inventory at the end of the first quarter stood at approximately $91 million, compared to approximately $100 million at the end of last year. We're expecting to sell through the vast majority of this pack and hold inventory at good margins by the end of this year. Excluding pack and hold, first quarter inventory was down 19% versus last year. We're projecting inventory will be down year over year in each of the remaining quarters of 2023. Total debt was down substantially versus a year ago, reflecting our repayment of the pandemic related financing in second quarter last year. Our leverage is low, approximately 2.8 times on a lease-adjusted basis. We believe our balance sheet cash flow and leverage profiles afford us significant flexibility for growth and to manage the current market environment. And subsequent to the end of the first quarter, we have further reduced the amount outstanding on our credit facility by another $60 million. We generated positive operating and free cash flow in the first quarter with both metrics up substantially over the prior year as a result of the factors listed here on page 7. We're continuing to forecast strong operating cash flow in 2023 of over $300 million, driven in part by lower inventory levels. Turning to page 9 and a summary of our performance of our business segments in the first quarter. As I previously mentioned, our first quarter consolidated adjusted operating margin was 8.3% compared to just over 13% last year. This decline was largely a function of fixed cost deleverage. Given the seasonality in our business, the contribution of revenue is more heavily weighted to the second half of the year. Expensity leverage was more pronounced in our U.S. retail and international businesses, which experienced more meaningful year-over-year sales declines relative to U.S. wholesale. Given the expected improvement in business trends in the second half of this year, I'll note that we're planning for double digit margins in each of our business segments on a full year basis. On page 10, we summarized some of the performance drivers for each of our business segments in the first quarter. U.S. retail sales declined 12% as inflation continued to adversely affect consumer demand. Comparable sales declined 13% within the down 10 to 15% range we guided to on our last call. As Mike said, we believe the persistent cooler weather has hampered demand for spring and warmer weather product. Despite the macroeconomic challenges, our average unit retail pricing improved in the mid single digits in the quarter, reflecting our ongoing focus on inventory productivity and improved pricing capabilities. While overall traffic was lower in both of our retail channels, traffic to our stores was meaningfully better than we had planned. U.S. Retail's adjusted operating margin was 8.1% compared to 13.6% last year. Better price realization was offset by expensity leverage, higher product and transportation costs, and higher inventory-related charges. In our U.S. wholesale business, net sales declined 9% compared to last year. As I noted earlier, sales exceeded our plan due to the earlier-than-planned demand. Versus last year, our lower Q1 wholesale sales reflected the conservative stance most every one of our wholesale customers has taken with regard to inventory commitments for 2023. Our sales decline also reflects the absence of sales to Bye Bye Baby. Regarding Bye Bye Baby, we have no incremental financial exposure given the recent bankruptcy filing of its corporate parent, Bed Bath & Beyond. We've fully reserved for the modest receivable we have outstanding and have begun reallocating inventory to other customers. U.S. wholesale segment operating margin was 18.4% compared to 19.7% last year. Better price realization and lower air freight costs were more than offset by higher product and transportation costs and increased bad debt expense. In our international business, sales declined in the quarter by 14% and were down 12% on a constant currency basis. This decline reflects lower demand in Canada and with wholesale customers outside of North America. Sales in Mexico grew in the mid-teens, driven by our expanding store footprint in this market, International adjusted segment margin was 3.3% compared to 9.7% last year. Expensity leverage and higher product and transportation costs drove the decline in operating margin in the quarter. The next couple of pages in our presentation summarize some of the unique strengths of our company. On page 11, Carter's is the best-selling brand in young children's apparel. We've built a very large business. We hold the number one market share in young children's apparel here in the U.S. and in Canada, and we're building a sizable share in Mexico. Tens of millions of consumers shop with us in our direct-to-consumer businesses and millions more with our wholesale customers. Generations of consumers have come to love the Carters and Oshkosh brands for their strong value propositions, with value meaning not only compelling price points but also quality, durability, and styling. Increasingly, we're telling the story of our brands across our various marketing channels, including a very active presence and engagement on social media. On page 12, NPD recently published some very interesting data for the baby segment of the market. This information makes it clear the depth and reach of Carter's with the various segments of the population which are purchasing baby apparel, Gen Z, Millennials, and Gen X. Carter's holds the leading market share in each of these generational groups. market share positions, which are generally multiples of the next closest brand. Turning to page 13, we're fortunate to have built a very large and profitable e-commerce business at Carter's. Our website offers consumers the broadest assortment of our products, and we're continually looking for ways to enhance the online shopping experience. An area of investment over the past several years has been our mobile app. Increasingly, consumers shop on their mobile devices as opposed to laptops and desktop computers. In just a couple of years, sales on our app have grown to represent about a quarter of all U.S. e-commerce sales, and our data shows that it's our very best and most loyal customers who are using the app. We continue to enhance and invest in our app with current efforts focused on building more sophisticated personalization capabilities and And currently, we're testing same-day delivery with Shipt, a first-of-its-type collaboration in young children's apparel. On page 14, we've spoken on recent calls about our Little Planet brand, which is focused on sustainability and organic materials. We consider ourselves brand builders here at Carter's, and while new children's apparel brands come and go in our market, few other companies have our ability to develop innovative and beautiful product and achieve the broad market distribution which characterizes our business. with a meaningful presence in the wholesale, retail store, and e-commerce channels. Based on strong consumer reaction to Little Planet, 2023 will be a year of meaningful growth for this brand. This year, we will roughly double the number of our Carter stores, which carry the brand. Additionally, we will triple the number of wholesale doors where consumers can find Little Planet. Our wholesale partners for Little Planet include Target, Kohl's, BabyList, and Macy's. We've also continued our product innovation in Little Planet, recently launching select women's styles focused on mommy and me dressing and maternity. On the next page, as warmer weather finally starts to arrive across the country, families are looking forward to summer holiday celebrations. Carter's has always led the market in providing great holiday outfitting, and we have some great red, white, and blue product to make this year's Fourth of July celebrations even more special. Now turning to page 16, Carter's exclusive brand for Target, Just One U, recently launched its latest spring styles across baby and toddler programs, and these products are featured prominently across Target's website, social media, and in-store marketing. Just One U continues to perform very well at Target, particularly baby. Target carries a very broad assortment of Just One U products, including some great playwear and sleepwear, which complement the strong baby assortment. Moving to page 17. Carter's exclusive brand for Walmart, Child of Mine, has also continued to deliver strong performance at this important consumer shopping destination. Earlier this year, we launched a new Child of Mine baby collection featuring new and elevated fashion. Building on the success of last year's relaunch of in-store and online branding, we're expecting good continued sales momentum and growth for Child of Mine. On page 18, Simple Joys, our Carter's exclusive brand for Amazon, will offer a new and upgraded digital experience for Amazon shoppers this spring. Simple Joys brand store photography and digital content have been updated and improved to highlight the best of this spring season styles and year-round best sellers. Demand for Simple Joys on Amazon continues to be strong, and we're forecasting good growth in the coming years in this important part of our business. Additionally, our relationship with Amazon has provided opportunities to grow SimpleJoy's outside of the United States with Amazon's extensive global reach. On page 19, we have a photo of a new Carter store which recently opened in Alpharetta, Georgia. As Mike said in his remarks, we're excited about the prospect of returning to store growth here in the U.S. This page summarizes some of the reasons we feel so strongly about the merits of expanding our store presence. We have a well-developed and thoughtful process for evaluating new store opportunities. We're rigorous in applying this process and sometimes say no to opportunities which are presented to us. We rigorously measure the performance of our stores. These investments lend themselves to observable and measurable metrics which we track closely. We view our stores as a distinct competitive advantage. We believe they offer the best assortment and experience for consumers shopping for young children's apparel. Going forward, we expect to continue to test new store formats and experiences as we grow this part of our business. On page 20, our partner in Brazil, Riachuelo, continues to grow the presence of the Carter's brand in this important market. Riachuelo now operates about 50 freestanding Carter's stores in Brazil and approximately 260 shop-and-shop locations within its department stores. In Mexico, which is a similarly sized children's market to Brazil, we continue to see very good growth. We recently opened our 25th larger format co-branded retail store, bringing our total number of stores to nearly 50 locations. As Mike mentioned, we see an opportunity to eventually have at least 100 stores in Mexico, in addition to continuing to develop the e-commerce and wholesale channels in this market. Moving to our outlook for 2023, beginning on page 22. Given the challenging macro environment, we are focused on the areas where we have the most control, namely productivity, earnings and cash flow. As we look to the balance of the year, we believe there are multiple factors that will continue to better performance in the second half relative to the first half. We've summarized some of the more significant ones here on page 22. An important overall assumption is that inflation and its impact on consumer demand will moderate as we move through the year. In the second half, our businesses will have a better mix of inventory than a year ago. The issues with port congestion are behind us, and we are receiving product on time. Overall, we expect to be leaner on inventories through the balance of the year. Store-level inventories are projected lower by more than 30%. This leaner inventory position is expected to yield multiple benefits, better sell-throughs, less clearance and promotional activity, and improved price realization. In our retail business, we expect to see a greater contribution from new stores in the second half. Our prior year comp sales comparisons also become less challenging in the second half. In wholesale, we will anniversary the significant destocking actions many of our wholesale customers took in the second half of last year, actions which included canceling orders at a historically high level, and in some cases, suspending automatic replenishment programs. In international, we have good growth planned in each component of the business with the largest contribution coming from continued momentum in our direct consumer operations in Canada and Mexico. Second half earnings are expected to benefit from the improved trend in sales across the business, which I just described, and we're planning meaningful gross margin expansion in the second half in part due to lower product and freight costs. We intend to continue to control spending tightly, and EPS is expected to benefit from a lower average share count. For the full year, on page 23, the majority of our business is ahead of us over the balance of the year. And today we are reaffirming our outlook for 2023. We are forecasting sales of approximately $3 billion. We're targeting adjusted operating income of approximately $350 million and adjusted EPS of $6.15. And as mentioned earlier, we're expecting solid operating cash flow this year. For the second quarter, on page 24, We're planning for net sales in the range of $590 to $605 million, or a decline in the mid-teens versus last year. But for the earlier demand in wholesale, which benefited the first quarter, we would have planned Q2 net sales down about 10%. Our overall outlook for the first half is consistent with our initial expectations coming into the year, if not a bit better. Our Q2 outlook reflects a US retail comp decline in the mid-teens and US wholesale sales down in the range of $20 to 25%. Again, second quarter wholesale sales will be affected by the earlier demand we saw in the first quarter. We're projecting a first half decline in wholesale sales in the mid-teens. And second quarter international segment sales are planned down in the mid-single digits. On profitability, we're expecting operating income in the range of $30 to $35 million and adjusted EPS between 40 and 50 cents. With these comments, we're ready to take your questions.