Carter's Inc

NYSE:CRI

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to Carter's First Quarter 2020 Earnings Conference Call. On the call today are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Brian Lynch, President; and Sean McHugh, Vice President and Treasurer.

After today's prepared remarks, we will take questions as time allows. Carter's issued its first quarter 2020 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 report filed with the Securities and Exchange Commission and the presentation materials posted on the company's website.

On this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, today's call is being recorded.

And now I'd like to turn the call over to Mr. Casey. Please go ahead.

[Michael Casey, Chairman and Chief Executive Officer]

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 several weeks now, thousands of our employees around the world have responded in a truly extraordinary way to challenges related to the global pandemic. Our investments over the years in talent and technology have enabled our employees to stay connected, productive and able to support the continued operation of our business. We have dedicated employees working every day in our distribution centers around the world supporting our vibrant e-commerce operations. They are also supporting demand from some of our largest wholesale customers whose e-commerce operations and stores have remained open.

We also have many store employees who have been furloughed since mid-March, and we look forward to having them rejoin us when some of our stores begin to reopen in the weeks ahead. And regrettably, in recent weeks, there were employees affected by our efforts to reduce labor costs and improved liquidity. These decisions were the toughest to make. Each of these employees contributed to the success of our company over the years, and we will now help them as they transition to new opportunities.

In times like this, we're fortunate to have so many employees throughout our company with decades of experience working for Carter's. Over the past dozen years, they have helped us recover from the financial crisis, The Great Recession and the cotton crisis. Each of those challenging periods in our recent history set us back temporarily. But in every case, we came back stronger.

In the five-year period following The Great Recession, our company grew sales by over $1 billion. During The Great recession, some of our competitors and wholesale customers struggled and some failed. As the major retailers became fewer and stronger, they relied on fewer and stronger suppliers to support them.

Carter's has been and continues to be the largest supplier to the largest retailers of young children's apparel in the United States. Our multichannel model is a distinguishing characteristic of our company. Our long and successful relationships with the largest retailers of children's apparel provide a significant advantage, especially now as consumers seek value and convenience when shopping for their families.

It was just 10 weeks ago that we briefed you on our results for 2019, our outlook for growth this year and our longer-term growth objectives. 2019 was our 31st consecutive year of sales growth. That strong demand for our brands enabled record levels of earnings per share and cash flow last year. 2020 was expected to be another good year of growth for us. Through early March, we were seeing mid-single-digit growth in sales. Our forecast at that time reflected sales, earnings and cash flow in line with our growth objectives this year.

In the second week of March, our sales began to decline as consumers reacted to the various media reports, which heightened the awareness of the risks related to COVID-19 and the related precautions that were needed. In the days that followed, for the safety of customers and employees, our store operations were suspended. Thankfully, Carter's has remained open for business and continues to support the demand for our brands through our extensive e-commerce capabilities, both direct-to-consumer and through the major retailers of children's apparel.

Amazon has been a source of significant growth for us in recent years, and they are especially helpful to us now given their extensive distribution capabilities. We also have the benefit of demand from some of our largest customers, including Target and Walmart, whose stores have remained open.

In late March, the mayor of Atlanta issued an executive order that mandated Atlanta residents shelter in place. That order required over 1,000 employees in our company's Atlanta office to work from home. This time of year, we're focused on developing our spring 2021 product offerings. Our talented merchants, designers and sourcing teams use virtual meeting and 3D product development technology to work with our suppliers to create a beautiful product offering, which will launch in the fourth quarter this year.

The beautiful images of our product offerings shown online are thoughtfully laid out and photographed by our photo studio team in Atlanta. Their work was disrupted by the stay-at-home mandate. That team quickly mobilized to support our e-commerce business, and they relocated to our Braselton and Stockbridge, Georgia distribution centers. We believe their commitment to relocate and continue their good work has enabled the acceleration in demand we are now seeing for our brands online.

In our retail business, our stores have now been closed for nearly seven weeks. Our stores in the United States contributed about 26% of our profitability last year. For modeling purposes, we're assuming our stores will begin to reopen in June. That said, we are preparing to reopen some of our stores beginning this week. We have nearly 270 stores located in states, including Florida and Texas that have lifted restrictions on store openings. We are operating on a principle of not being the first to reopen in the center nor the last. But at least 25% of our stores in each center are open, we plan to reopen. 85% of our stores are located in open-air shopping centers, making it easier for consumers to see that we have reopened and the number of guests in the store and the beauty of our product offerings. We expect our store sales will gradually ramp-up in the balance of this year.

Our store associates have been briefed on our plan to begin reopening our stores, and they – we believe they are eager to get back to work. Like so many parts of our business, we have long- tenured store employees who love Carter's, and they are an integral part of the consumers' experience with our brands. As we prepare to reopen our stores, we will be using best practices in cleaning and protective equipment to ensure the safety of our customers and store associates.

E-commerce continues to be our fastest-growing and highest-margin business. Last year, our direct-to-consumer e-commerce business contributed less than 20% of our sales and over 30% of our profitability. Our Carter's brand has the largest share of online sales of children's apparel in the United States, nearly twice the share of our nearest competitor. Together with the support of our wholesale customers, we expect the online purchases of our brands to exceed $1 billion this year.

For the past seven weeks, demand for our brands online, both direct-to-consumer and through our wholesale customers, has been accelerating. In recent weeks, we have seen triple-digit growth rates in e-commerce demand for our brands. Some of our largest wholesale customers are seeing e-commerce sales of our brands that exceeded sales during the week of Black Friday last year.

Our exclusive brands are seeing the highest rates of growth online. We believe we are seeing a significant benefit from traffic to those retailers who are selling groceries and other essential core products. We believe the surge in online demand for our brands is also driven in part by the stimulus checks from the United States government. That financial support is clearly a significant benefit for families with young children.

We're seeing the highest rate of sales in our core Baby and sleepwear products. Interestingly, we've also seen our Carter's Crib sales more than double over the past couple of months. Some of our largest wholesale customers recently told us that baby apparel is one of their best-performing product categories, and one customer said they are seeing a surge in pregnancy test kits. Those data points may prove to be one of the many silver linings we hope to see when the global pandemic subsides.

Carter's is known for its strong value proposition. Our average price points for apparel are less than $10 per unit. We offer the essential everyday basis families with young children. Bodysuits, wash cloths, towels, bibs, blankets and pajamas, each of these products are bought in multiple quantities to enable easy dressing and care for children in their early years of life.

Over our 150-year history, multiple generations of families have trusted Carter's for quality and value. During The Great Recession, I recall one of our largest wholesale customers thanking us for the strong performance we delivered for them during the year-end holiday season. When I asked why they believe we had performed so well relative to other brands offered, they said, "In uncertain times, consumers migrate to the brands they trust." That may be what we are now seeing in the strong demand for our brands.

The lingering effects of the pandemic and stronger dollar are expected to weigh on international demand for our brands in the balance of the year. Brazil, Argentina and the Middle East have been some of the largest contributors to our international sales outside of North America. Oil prices are an important driver of the economies of some of our international partners. We expect lower oil prices will also impact the demand for our brands this year.

The current strength in our international business has been our e-commerce operations in Canada. Similar to the United States, our stores in Canada were closed on March 19. Prior to the store closures, e-commerce sales in Canada were trending up about 25%. Second quarter-to-date e-commerce demand in Canada is up over 170%.

When the risks related to COVID-19 became clear to us, we set in motion two primary work streams. The first is focused on safety. The second is focused on liquidity. To ensure the safety of our distribution center workers, we significantly reduced the staffing in those facilities to enable safe distancing. We also invested in thermal scanners and nursing resources to identify and assist workers who may be ill. Extensive cleaning and an emphasis on good hygiene and safe distancing have all contributed to our efforts to keep our frontline distribution workers safe. We have operated with a principle of safety over speed. Though the speed of delivering e-commerce orders is not currently to our normal standards, it is consistent with some of our competitors who we believe are also challenged by the need for safe distancing.

To improve the speed of delivery in the balance of the year, we plan to and have repurposed our Stockbridge distribution center to supplement our e-commerce fulfillment capabilities, and we opened 200 of our largest retail stores for the sole purpose of resuming our ship-from-store initiative. That e-commerce capability is planned to extend to 600 stores by this fall. We have also invested in face masks and face shields for our distribution center teams and other employees who will be returning to work. And we have walked back promotions to manage consumer demand until we can safely ramp up staffing in the weeks ahead. Collectively, we believe our focus on safety through temporary store closures, work-from-home capabilities and support for our distribution center workers has been highly effective, keeping our employees protected from infection.

With respect to liquidity, our focus has been to maximize liquidity in the shortest amount of time. Among other things, we have significantly reduced inventory commitments, labor-related costs and other variable and discretionary expenses. We've worked with our suppliers and landlords to extend payment terms. We suspended share repurchases, and our Board of Directors suspended our quarterly dividend. The cumulative effect of our efforts to date suggests we will have ample liquidity for the foreseeable future despite lower sales and earnings due to the global pandemic.

As we work through downside modeling scenarios this year, our lenders assured us that the current market challenges were a health crisis and not a financial crisis. And that given the strength of our brands, market leadership position and successful multichannel business model, Carter's would have access to additional capital, if needed. Our bank group has been very supportive during the crisis. They were highly responsive helping us amend our revolving credit facility. We believe that amendment will provide ample time for our company to recover the effects of COVID-19.

Carter's has a long history of generating significant levels of cash flow even when it was a much smaller company years ago. Though our models do not suggest additional financing is needed, it may be prudent to add some measure of protection given the uncertainty in the timing and extent of the market recovery. We are exploring that opportunity and may have more to share with you in a future update.

In recent weeks, we find ourselves reflecting on what we describe as the silver linings we're experiencing and envision possible as a result of this catastrophic shock to our lives and livelihoods. We learned how quickly we could respond and reduce the risk of infection for our customers and employees, how we could adapt to working remotely and functioning effectively to support the continued operation of our business. We saw the level of commitment and determination of our employees to support the essential needs of families with young children and how quickly we could improve liquidity to absorb the shock to the global economy as stores closed and our freedom to travel restricted.

During this disruption in our business, we have not forgotten those most in need during this crisis. We're providing over $1 million of children's apparel to our good partners at Delivering Good. That's the organization formerly known as Kids in Distressed Situations. We are also sending thousands of face masks to health care providers and families whose children are being cured for at Children's Healthcare of Atlanta. And we provided help to families whose homes were destroyed by tornadoes that moved through Georgia in April.

Carter's has been blessed with thousands of extraordinary people around the world who have built our great company over many years, each of them in some unique way is contributing to our efforts to lead Carter's through this crisis. With their support, we believe Carter's will once again emerge stronger and better prepared to pursue new opportunities that will be available to us when the market fully reopens. I'm grateful to all of our employees for their commitment to Carter's and to each other. One of our core values is to succeed together. We're all looking forward to getting back together again soon and focused on providing the best value and experience in young children's apparel.

Over the years, one of our closest advisers would often say that Carter's success has been driven by the strength of our brands and the strength of our balance sheet. While I agree that is true, I believe the fundamental strength of our business has been the talented employees who have supported Carter's for many years. In many cases, we have multiple generations of families who have worked for Carter's in good years and tougher years. This will certainly be one of those tougher years. And though many things have changed in our lives in recent weeks, one thing remains the same. Beautiful babies are born every day, and the number one brand consumers choose for their new baby, five times more than any other apparel brand, is Carter's. With the support of our employees, customers and business partners, we believe Carter's best days are still ahead of us.

Richard will now walk you through the presentation on our website.

[Richard Westenberger]

Thank you, Mike. I'll pause for a moment on the cover page of our presentation this morning. These beautiful little girls are actually wearing some of our current best sellers. Based on the great business that we're doing online right now, consumers are stocking up on swimwear and rash guards like these, looking forward to the arrival of warm weather and buying in advance of a busy and active summer.

There are two broad topics that I'd like to cover this morning. First, I'll provide some further information on our first quarter performance; and second, and perhaps most importantly, our plans to manage through this current crisis, strengthen our business and emerge on the other side as what we believe will be a stronger and more successful company for many years to come.

To begin then on Page 2, we've summarized details of our first quarter net sales here, which were $654 million in total. This represented a decline of 12% over last year. As Mike said, our business was reasonably on track with our plans through about the middle of March. That's when disruption from COVID became more pronounced, most noticeably with a drop in consumer traffic to our stores. March is historically one of our larger months of the year. So that even after losing half of a significant month like this, net sales only declined 12% year-over-year. For reference, we had planned sales to be comparable to perhaps up a bit in the first quarter.

In terms of our balance of sales, about half of our sales in the quarter were from our U.S. retail segment, almost 40% or over $250 million were from our U.S. wholesale segment, with the balance of our sales from international. While net sales declined in all of our segments in the quarter, we had notable bright spots in the areas of e-commerce and demand for our exclusive brands, which I'll describe more fully in a moment.

Before we talk about profitability in the quarter, on Page 3, the first quarter was unique in the number of special or unusual charges, which we recorded, most related to the COVID-19 pandemic. We've included a summary of those items, which hopefully will be helpful as you analyze our reported results for the quarter. First, we incurred some costs in the quarter related to organizational restructuring. These costs relate to initiatives largely underway prior to and unrelated to COVID-19, such as consolidating various teams and functions into our Atlanta headquarters. Going forward, I expect we will have further restructuring type costs during 2020 related to some of the staffing reductions we implemented in April as part of our spending reduction actions.

We're endeavoring to capture discretely the expenses that we are incurring directly related to the pandemic. The $4 million reflected here includes spending on payroll continuation for our store associates during the first two weeks of store closures, additional cleaning services in our offices and distribution centers, having nurses on-site in the DCs and other similar costs. We will track and provide visibility to these expenses as we move through the year. And finally, we took a number of noncash charges in the quarter amounting to approximately $100 million in total.

Given our lower near-term sales and profit outlook relative to our previous forecast because of COVID-19, it was necessary to reassess the carrying value of the intangible assets on our balance sheet. As a result of this analysis, we reduced the values of the Skip Hop and OshKosh trade names and the carrying value of goodwill related to a portion of our international business. We also took significant provisions in the quarter for excess inventory and increased our reserves for potential bad debts.

Regarding inventory, demand is, of course, lower than we had projected. And as such, we've defined some portion of our inventory on hand or soon to arrive as excess. Accounting practice and prudence require that we establish reserves for this inventory.

And finally, as it relates to higher bad debt provisions, we are fortunate that our business in the wholesale channel is being driven by some of the most successful retailers in the marketplace right now. As such, our receivables balances are concentrated with these retailers which are well capitalized, driving significant business and importantly, paying their bills on time. For other customers in our wholesale segment, we have increased our provisions for bad debt, given the elevated risk in the marketplace and the circumstances of some customers, in particular.

On Page 4, we've included our GAAP basis P&L for the first quarter. This P&L view includes all of the charges that I just covered, which contributed to the $78 million operating loss we reported for the quarter. Most of our discussion today will focus on our results on an as-adjusted basis, which excludes the items treated as non-GAAP adjustments as indicated on the previous page.

On Page 5, looking at our profitability in the first quarter on an adjusted basis, in this chart, we've provided some perspective on the major drivers of the decline in adjusted operating income. These include the lost profit from lower revenue, in part from the store closures in March and the substantial charges for inventory and bad debts, which I just mentioned. We did have a benefit in the quarter from lower spending, including from lower performance-based compensation.

Our adjusted P&L for the first quarter is on Page 6. Gross margin in the quarter was approximately 35%, down significantly versus a year ago. The major drivers of the decline were the higher provisions for excess inventory as well as a higher mix of lower gross margin wholesale sales compared to last year. Royalty income was down a little over $1 million year-over-year. This decline was due to the reasons we've cited in the last couple of quarters, specifically, the end of the Genuine Kids royalty model with Target as we've begun selling the core OshKosh brand to this customer now and the in-sourcing of previously licensed product categories.

On SG&A, we did cutback on spending in a number of areas, although the COVID disruption came later in the quarter, limiting some of our possible response. Provisions for performance-based compensation are meaningfully lower than a year ago as part of our spending reduction actions. These benefits were largely offset by the higher provisions for bad debts that I described earlier. As mentioned, our adjusted operating loss in the quarter was $26 million.

Below the line, we had a foreign exchange loss due primarily to the revaluation of U.S. dollar denominated loans, which we have in place with certain of our foreign subsidiaries. Our effective tax rate was lower in the quarter, a little over 14% compared to about 21% last year. We're projecting that we will have lower U.S.-based income this year, so more of our profitability will come from lower tax rate jurisdictions outside of the United States.

Our average share count declined 4% compared to last year, reflecting the benefit of share repurchases. So on the bottom line, in the first quarter, our adjusted loss per share was $0.81 compared to earnings per share of $0.87 in the prior year.

Turning to first quarter results for the U.S. wholesale segment on Page 7. Sales in this segment were down about 8% versus last year compared to our plan for a decline in sales of about 2%. We saw good demand through February. Similar to our retail business, our wholesale customers began to experience disruption due to COVID-19 in March as their stores closed. As a consequence, order flow and requests for product from us slowed. We saw good continued demand for our exclusive brands in the quarter. Fortunately, the retailers where we sell these products are among the strongest in the market, and their stores have largely remained open.

Our exposure to retailers with perhaps more challenging performance has continued to decline. Sales to retailers, which are based primarily in traditional malls, represented about 4% of our total company sales in the first quarter. Where we have concerns about specific customers, we are focused on mitigating our risk as much as possible, such as through strict adherence to credit limits and establishing higher reserves for possible bad debts.

Demand from wholesale customers for our products online was strong throughout the first quarter, and this strong demand has continued into Q2. Our most significant wholesale customers are seeing second quarter-to-date demand for our brands up over 100%. Profitability in the U.S. wholesale segment declined due to lower sales volume and the inventory and bad debt costs I mentioned.

Turning to first quarter results for the U.S. retail segment on Page 8. Total U.S. retail segment sales declined 15% in the first quarter. We were tracking roughly in line with our plans until mid-March when we started seeing COVID begin to impact traffic to our stores. For the safety of our customers and employees, we began closing stores on March 15. And on March 19, we closed all of our U.S. stores.

Demand online was more consistent throughout the quarter, but we saw some disruption in mid-March as consumers turned their focus to buying groceries and other supplies as they began to quarantine. We saw strong online demand from domestic customers in the quarter, up about 20%. And demand from international consumers from countries such as Brazil, Russia and Argentina was down in the first quarter, which we attribute in part to the strengthening of the U.S. dollar and lower oil prices in key markets around the world.

This strong demand coupled with additional temporary safety measures at our DC has resulted in delays in shipping to our customers. We are accelerating the activation of additional ship-from-store fulfillment capabilities. And by later this fall, we expect to have 600 stores fulfilling online orders. We've also enabled an additional distribution center to execute online order fulfillment, further increasing our daily processing and shipping capacity. We expect that longer ship times to customers will probably continue through May and then improve in June.

On Page 9, we've depicted the dramatic increase in demand for our brands, which we're seeing in the online channel across our wholesale customers and on our own websites in the U.S. and Canada. Consumers are obviously taking advantage of the convenience and safety of shopping online during this historic public health crisis. Our wholesale customers are seeing tremendous demand for our brands through their own websites, and we're fortunate to have this business in addition to the considerable demand we are seeing on carters.com. Most other companies don't have this advantage.

We're expecting elevated demand in the online channel across the balance of this year. Supporting the strong forecasted growth in e-commerce has been one of our key strategic priorities well before COVID-19. And as Mike said, across our wholesale customers and our websites, we expect over $1 billion of our brands will be sold online this year.

On Page 10, we've included some images from our website and mobile app. Similar to the cover of our presentation this morning, the images we use in our online business feature beautiful children wearing our products. We're constantly refreshing the messages and offerings that we showcase on our website to highlight for mom what she's most likely shopping for. Right now, that's brightly colored shorts, T-shirts and outfits designed for summer. We always have special products for celebrations and key holidays, such as the 4th of July. Our website makes it easy for consumers to shop for all of our brands; Carter's, OshKosh B'gosh and Skip Hop. We think these broad assortments with several distinct but complementary brands are significant differentiators in the market compared to other retailers whose offerings and websites are oriented around single brands.

On the subject of supporting e-commerce, on Page 11, we have a few photos of our employees in our Braselton distribution center. These employees have continued to report to work to help us support the strong online business that we're delivering. We have taken steps to increase the safety and security of our distribution centers during this period. We've installed thermal scanners, so we can better detect employees who might be running a fever. We have reduced staffing levels below what might otherwise be optimal to support the current demand, and we've reconfigured operations in order to increase social distancing and minimize contact within the facility.

We've instituted the use of masks and gloves and workspace partitions, and we've increased our cleaning protocols to keep this vital facility operational and our employees healthy. We also have nurses on site, who are monitoring and evaluating the health of our teams. We're grateful to these employees for their hard work and dedication.

Beginning on Page 12, we've included some examples of our recent marketing communications. I think this material highlights the unique place our brands occupy in the lives of families with young children and the emotional connection that our brands foster with our customers. Page 12 includes examples of how we began to modify the tone and content of our e-mail and social media communications to reflect the unique time in which we find ourselves.

Since Carter's is a brand that truly understands what it means to be apparent, we shifted our messaging across our various touch points to emphasize support for parents and children. To this end, we have created over 600 free activities, ideas and games to help parents educate and entertain kids who are out of school and home full-time these days.

On the next page, looking ahead to the month of May, we know that moms are wearing a lot of hats these days, mother, teacher, nurse, coach and many more. One day, Mother’s Day, is clearly not enough to recognize all that moms do, so we’ve declared May to be the month of mom, who better to recognize and celebrate moms than Carter’s. We’ll have some special events over the course of May, including a virtual baby shower at the end of the month. We’re going to enlist someone special to help us with that event, and we’ll announce who that is later. With OshKosh, we know a lot of summer camps probably won’t happen this year, so we’ll launch Camp OshKosh, a virtual camp for Memorial Day, through the 4th of July, with daily activities such as live music and art classes, fashion shows and crafts, again, all with the idea of supporting parents with kids at home, maybe unexpectedly this summer.

On Page 14, one of the most impactful social media posts that we’ve ever had was in the first quarter. This post involved a donation of preemie bodysuits, which we recently made in support of patients and first responders at Northside Hospital here in Atlanta. In case you can’t quite see the product itself in this photo, the bodysuits say, "My Super Heroes Wear Scrubs." Certainly, an appropriate sentiment for nurses working in neonatal intensive care units, doing amazing work to care for premature babies. This post drove significant engagement among our followers and reinforced Carter’s core values. This particular post represented our highest-performing user-generated content of all time, driving engagement 3.5 times our benchmarks. On the subject of social media overall, in the first quarter, we grew our number of followers on Instagram at a rate over 50% faster than our competitors. And over the last few weeks of April, our brands accounted for over 90% of all engagement among children’s apparel brands.

Finally, on Page 15, we tapped into the creativity of our own employees to execute a branded video and campaign, oriented around the theme that we are all in this together. This video, featuring the children of our employees playing, learning and just being with their families at home during this tough time, was sent to our customers in e-mail and posted on our various social media platforms. It’s been viewed over 600,000 times and has driven 15 million impressions across our marketing channels. As part of this campaign, Carter’s donated over $1 million worth of apparel products to families in need and hundreds of thousands of masks for use in local hospitals here in Atlanta. We think there are few brands which are able to connect with consumers in such a meaningful, genuine and impactful way.

Turning to our International segment results in the first quarter on Page 16. Sales in this part of our business were down about 8% in the quarter. Similar to the United States, we closed our Canadian and Mexico stores in response to COVID-19, which has led to lower net sales and profitability. We’ve seen good demand online in Canada, and we’ve seen very good traction online in Mexico, where we launched e-commerce last year.

Turning now to our balance sheet on Page 17. A distinct advantage for Carter’s coming into this crisis has been our balance sheet. We’ve always managed our balance sheet and capital structure conservatively. We had modest leverage beginning the year and significant liquidity available to us. We ended the first quarter with nearly $760 million of cash on hand. Our cash on hand has grown by roughly an additional $100 million since the end of the first quarter. Our net receivables from wholesale customers were $222 million at the end of the first quarter. The majority of this balance relates to the very strong business we’re driving with some of the best retailers in the country.

We continue to monitor our business with all of our wholesale customers and where appropriate, we have stepped up reserves for potentially uncollectible receivable balances. Net inventory was up 8% at the end of the first quarter. We have plans in place to carryover approximately $110 million of our spring and summer product, which was never shipped to wholesale or to our retail business as a result of the pandemic. We’ve also established higher reserves on our elevated inventory balance, which is appropriate given the circumstances. Our merchandising, retail, wholesale and supply chain teams are collaborating closely to maximize the value of our inventory. And inventory productivity has been a key initiative for us well before we face this current challenge of COVID-19.

Coming into 2020, we had already planned to buy second half inventory much more conservatively than historically. Now with our current outlook, we’ve been able to reduce our commitments even further in order to increase our operational flexibility and liquidity. We’ve also taken a number of actions to stretch out our disbursements in this period when a meaningful portion of our business is shutdown. We’re extending payment terms with our suppliers, landlords and other partners. As Mike said, one of our principal work streams, since this crisis began, has been focused on liquidity.

Expanding on this topic further on Page 18. We took a number of actions immediately once the severity of COVID-19 became more apparent, and we’ve continued to take appropriate action to manage the company through what will clearly be a sustained period of market disruption. In mid-March, we drew down on substantially all of our revolving line of credit. Fortunately, we only had a modest amount outstanding on this line at the time. So it provided an immediate and significant source of cash. As discussed, we have also moved to reduce our forward inventory commitments and reduce our working capital through extension of payment terms with our various partners.

We’ve also suspended our return of capital program, both share repurchases and our recurring quarterly dividend to further conserve cash. We scaled back our plans for capital expenditures significantly by about half versus last year. Our spending will be primarily in support of capacity enhancements at our Braselton, Georgia, distribution center and in critical technology initiatives, including IT security. We’ve taken strong action to reduce the significant controllable expense, which is compensation. We’ve eliminated the provisions this year for performance-based compensation in its various forms. All of our salaried employees are taking pay cuts to varying degrees as is our Board of Directors.

And as Mike said, we unfortunately have furloughed and permanently separated a number of our employees. The sum total of all these actions and our outlook for recovery of the business under what we believe are conservative assumptions beginning this summer indicates that we have sufficient liquidity to weather the current storm. We’ve also taken additional steps to further increase our financial strength and position in this uncertain time. First, we’ve received the support of our lenders, which include some of the finest financial institutions in the world to provide covenant relief over the balance of this year and throughout 2021 as our business works through the COVID-19 disruption.

Second, while our forecasts do not indicate a need for additional financing, we believe it’s appropriate to explore raising some additional funding subject to market conditions. If we are successful raising additional capital, we would use some of the proceeds to pay down a portion of our outstanding revolver borrowings and to further bolster our liquidity. And overall, our objective is to increase our flexibility as we move into the second half of this year and beyond.

Now to comment on our outlook for the balance of the year on Page 19. It’s safe to say that COVID-19 will have a material impact on our operations and financial performance this year. We are not providing specific financial guidance today, which is hopefully understandable given the significant uncertainty which exists. At a high level, given the impact of store closures in our retail channel and in wholesale, we expect losses will continue through second quarter with a return to profitability beginning in the third quarter. We’ve been conservative in our modeling assumptions regarding how we believe our business will gradually recover as the world begins to open back up. Some of our stores will begin to open as early as this week, assuming that consumer traffic and sales will rebuild slowly once the stores reopen.

We’ve also been thoughtful regarding the demand which we expect from the wholesale channel. Fortunately, the seasonal transition to colder weather product later in the year works in our favor. We believe our wholesale customers will need this fresh new product from us in their assortments. And as mentioned, we anticipate good continued demand in the e-commerce channel. We will follow the guidance of public health and government authorities as we look to open the portions of our business, which have been closed. Of course, everything we do will be focused on the safety of our customers and employees.

On the next page, while we’re not providing financial guidance today, we have recapped a few pages of perspective on our company, which highlights some of the reasons for our confidence in our path moving forward. On Page 20, these are some of our core advantages. We have focused our business in one of the most attractive components of the consumer and apparel world, and that is young children’s apparel. The Carter’s brand has twice the share of our next closest competitor, and we grew our market share last year in a down market. Families with young children absolutely need what we produce. Our products carry the most established and trusted brands, which are known to generations of consumers not only in the United States but around the world. And we enjoy broad market distribution. If you were in the market for young children’s apparel or related products, you will have ready access to our brands.

On Page 21, this business has a long track record of delivering growth, both on the top and bottom lines. We expect it will be a smaller business near term as a result of COVID-19, but it’s important to know our ambitions are consistent with those that we shared with you this past February to reach $4 billion in sales and expand our operating margin along the way.

On Page 22, one of the hallmarks of this business has been the consistent generation of cash. Our forecasts indicate that as we work through our present situation, this will be the case again. We fully expect to generate substantial cash flow going forward as our business and the broader marketplace recover. To Mike’s earlier point, on Page 23, we have a long-tenured and experienced leadership team. Many of us have committed substantial portions of our careers to this company. Improving Carter’s, growing this company for the benefit of our customers, our employees and shareholders, is a highly personal mission for us. We’ve worked through very difficult situations in the past. We fully expect we will do the same in these circumstances.

And now we’re ready to take your questions.

[Operator]

Thank you. [Operator Instructions] And we’ll take our first question today from David Buckley with Bank of America.

[David Buckley, Bank of America]

Good morning, guys. Thanks for taking my question. Can you spend a few minutes just discussing your plans for store reopenings again? Do you plan to open all stores in states who are allowed or test a few and then react based on 25% of the stores being opened in those spaces?

[Michael Casey, Chairman and Chief Executive Officer]

So we have about 270 stores that can now reopen in states where the restrictions have been lifted. So we have about 90 stores in Texas, some portion of it, another 60 in Florida. And so our plan is beginning this week, we’ll probably open up 10. Our plan is to go slowly. We’ll have what we call soft reopenings. We’ll make sure that we’re in there, and the stores are squared away, and we have all the safety precautions taken. But the ramp-up by the end of May, we could have as many as 60% of our stores opened by the end of May, and then it will rollout from there.

So we’ll take it a week at a time, but we are – we have been preparing during this whole period of closure to reopen. So we’ve been staying in touch with our store associates. They’re eager to get back to work. A lot of the work has been done. So the stores will begin to reopen this week. And by the time we update everyone again in July, our guess is we’ll probably have more than 80% of our stores open at the end of July.

[David Buckley, Bank of America]

Okay. That’s great. And what percentage of your wholesale partners currently have stores open?

[Michael Casey, Chairman and Chief Executive Officer]

The volume from the way I look at it with these exclusive brands with Amazon, Target and Walmart, they’re probably representing over 50% of our wholesale business right now.

[David Buckley, Bank of America]

Okay. Great. Thank you, Mike.

[Michael Casey, Chairman and Chief Executive Officer]

You’re welcome.

[Operator]

And next, we’ll move to Paul Lejuez with Citi.

[Paul Lejuez, Citi]

Hey, guys. Paul Lejuez, Citi. Just – you mentioned, I think, 4% of your sales were from the department stores. I just wanted to know who you’re including in that group? And maybe if you could give any additional color on percentages within that wholesale channel? In 2019, maybe using a more normal year, what percent certain retail partners – wholesale partners of yours represented? So that’s more kind of near term. And longer term, just curious, understanding your growth plans might be altered temporarily, I’m also curious as to how you’re thinking about your longer-term plans to open mall stores? And if that’s changed, just given what we’ve been experiencing? Thanks.

[Michael Casey, Chairman and Chief Executive Officer]

Brian, you want to take department stores? I’ll take the growth.

[Brian Lynch, President]

Yes. As far as department stores, I think we hesitate to call out specific accounts. I think we’ve said before that the mall-based department stores continue to represent a smaller portion of our wholesale sales and our overall company sales. So the folks at the department stores that are based in malls are representing this year less than 4% of overall sales. And for those folks that have financial – we have financial concerns about, we feel we’re appropriately reserved. We’ve managed the inventory, and we’ve got good relationships with those folks. We talk to them every day. We’re certainly cheering for them.

But I think it’s important to also highlight, what Mike said, that this year, we believe about 50% of our wholesale sales are going to be with the accounts that we ship exclusive branded product to. So that’s the Amazons, Targets and Walmarts of the world. So we continue to grow rapidly with the folks that have the strongest financial positions. And as far as the other ones, they continue to be a smaller portion of our business.

[Michael Casey, Chairman and Chief Executive Officer]

Yes. In terms of the growth plan, suffice it to say, this year, the sales and earnings will be lower. What we’ll learn in the balance of the year is how quickly the stores ramp back up. Your question with respect to the malls, the mall stores have been extremely good for us. Keep in mind, our history has been in largely outdoor shopping centers. Our – years ago, we – and today, we still have the best outlet stores in the business, number one and number two market share, Carter’s and OshKosh and outlets. We evolved from the outlets into open-air strip centers because they felt a lot like outlet centers to us. And that has been a beautiful source of growth for us. We stayed away from malls for all the obvious reasons. But in recent years, new opportunities have become available to us. So we proceeded with Crusher. Probably today, out of 860 stores, we probably have about 70 malls.

Our game plan was to open maybe another 30 over the next five years. And that was the game plan until Gymboree closed all their stores. So gradually, we started to just test a new store format to smaller store format in some of those former Gymboree mall locations, and the performance was terrific. Whether it’s going to continue to be terrific near term, time will tell. But our plan is, over the next five years, our current thinking is we will close more stores than we will open. We’ll open where the best real estate is available. Again, one of the silver linings, and I think there will be many based on what we’ve experienced in over the past couple of months is that the real estate market is going to be much more favorable.

Kids apparel is a traffic driver for these centers. People seek out Carter’s to bring them into centers because it brings families with young kids into those centers. So I think the real estate market is going to be much more favorable. So we’ll – it’ll be a buyer’s market, and we’ll be thoughtful in terms of what locations we go into. We always have them. Our batting average has been pretty good, not perfect, but pretty good over the years.

[Paul Lejuez, Citi]

Thanks, Mike. And Richard, just to follow-up, that 50% of sales, Amazon, Target, Walmart, what was that number last year from those three?

[Richard Westenberger]

Closer to 40%.

[Paul Lejuez, Citi]

Thank you, good luck guys.

[Operator]

And next, I’ll move to Ike Boruchow with Wells Fargo.

[Ike Boruchow, Wells Fargo]

Good morning, everyone. I hope you all and your families are doing well. I guess, two questions. So the first part is on the inventory, maybe for Richard or Mike, can you comment a little bit more on the carryover spring/summer product? What exactly you guys are trying to do there? And also, what are you doing with the written-down inventory? And what channel or geography is that merchandise? And do you plan to have further write-downs potentially in the second quarter?

[Richard Westenberger]

Sure. Sure. On the first part, Ike, so there’s around $110 million of spring and largely summer product that just because of how the spring has unfolded here, we have not shipped to our wholesale customers. We’ve not shipped to our own retail stores, and it’s not online. So these are largely programs that, in their entirety, have not made it to market yet. It’s otherwise beautiful product. We think it’s a product that’s going to be extremely well received. And in fact, we’ve shown some of it to our wholesale customers.

Had circumstances been different, they were excited about taking it this year. But given what we think is going to be an enormous quantity of spring product in the marketplace, and the clock is ticking, we don’t think it’s appropriate to have this product enter into the sales channel at this point. We think the best strategy for us is to pack and hold it, and we’re going to do that in a couple of different locations, some in Asia, some here in the United States. We’ll bring that product back a year from now and introduce it to the marketplace.

As it relates to the excess inventory and the written-down inventory, to use your phrase, we have multiple plans for that. I’d say, first and foremost, we are historically and appropriately conservative in how we establish these reserves. I can tell you, this management team is incredibly focused and motivated to do better than those charges that we’ve set aside – the balances that we’ve set aside for this inventory. So our ambition and our mission and our operational planning is oriented around maximizing the recovery on this inventory and not taking a loss on it. We will do that through, I think, a couple of different channels.

Certainly, we’ve made use of the off-price channel. In past years where we’ve had excess inventory, that will be a component. We will also look to use our extensive direct-to-consumer capabilities here in the U.S. to clear some of that inventory. So we’ll use some of our retail stores. We’ve kept some stores, which were slated to close, open for a longer period of time. So we’ll have those doors available to help move some of that product. We will look at the online channel as well. So it will be a combination of strategies, all oriented around the objective of maximizing the recovery on that investment and inventory.

[Michael Casey, Chairman and Chief Executive Officer]

Yes. You referenced wholesale. So two ways to think about wholesale. One, the exclusive brands. And I would say, with respect to exclusive brands, we’re chasing demand right now. So we wish we had more to support our exclusive brands based on the performance we’re having them – with them currently. And then there are our other wholesale customers, where when their doors reopen, they’re going to need to move through the product that they would have otherwise moved through over the past seven weeks. And their first orders will likely be on the fall product categories.

The good thing to know is that every day, our sales team is engaging with our wholesale customers. Understanding what they need, what they need when they reopen, how we can support them in the balance of the year. So even though their doors have closed, there’s a very high level of engagement. Supporting their e-Commerce business, for those who have closed the stores, e-Commerce business, even including the department stores, the e-Commerce demand has been robust for our brands. And our wholesale customers are highly engaged with our sales team, thinking through the balance of the year and what needs they have from us.

[Ike Boruchow, Wells Fargo]

Got it. And then just one follow-up. You guys have been really helpful with the quarter-to-date on e-Com and the pace of reopenings, and that helps us kind of work with our models a little bit. I guess, on the wholesale side, it’s a little bit more of a black box for us. Is there anything else you guys could provide in terms of maybe bookings or quarter-to-date in U.S. wholesale or any kind of visibility? I assume the growth rate is going to be lower than the negative 8%, you just put up in Q1, of course. But is there any other color you can kind of give us to help us think about expectations on U.S. wholesale?

[Brian Lynch, President]

I cannot give specific numbers. I think just to reiterate some of the things, we talk to these guys every day. We talked about the exclusive brands selling well. Anybody on groceries and essential items are winning. People that are shipping e-Commerce orders out of their stores are faring better than other accounts, and we’re replenishing those that are performing real well. So as far as the majors that we talked about, we are chasing demand with those folks. As far as some of the mall-based department stores are primarily the people that closed their doors, they have canceled their orders for Q2. We’re going to pack and hold those for next year.

A good amount of the Q2, the back half of the Q2, we would hope to be shipping fall and winter products. So by and large, they’re not asking for spring and summer product. They’re asking us to hold those for next year. And our plan is to start shipping – the fall product will be the first fresh product that they have. So it’s a wait and see in some of this stuff. I think where we hesitate is we have door opening plans. The major retailers have door opening plans. But as Mike said, this is a health crisis, not a financial crisis. So we’ll have to wait and see as the doors reopen, what the consumer demand is, what the pull is.

I will say that from a product standpoint, what we’re excited about is a lot of the basic products are selling well. So the things that we have in stock, our baby and sleepwear product are selling well, anything that’s playful and optimistic with summer characters, Americana is doing well. Our Little Baby Basics product has accelerated. I think we had record sales a couple of weeks ago in online. And those are the products that we’re chasing, those and some playwear basic products for summer. So the things that we have in stock from a replenishment standpoint, which tend to be the most profitable products for us as well as the wholesale accounts are the things that are selling best and the things that by and large, consumers are looking for today.

[Ike Boruchow, Wells Fargo]

Thanks, Brian. Thanks, everyone.

[Operator]

And we’ll move on to Susan Anderson with B. Riley FBR.

[Susan Anderson, B. Riley FBR]

Good morning, thanks for taking my question. I hope everyone is doing well. Just a follow-up on the inventory in the stores. I’m curious, have you been able to get into all the stores to utilize that for online purchases? And then also as you fulfill your own online purchases, have you seen any delays in shipping? Or is there anything you’re doing different to fulfill the increase in online demand?

[Michael Casey, Chairman and Chief Executive Officer]

Sure. So we’ve got 200 stores open right now. They were reopened for the sole purpose of supplementing our e-Commerce fulfillment capabilities. That initiative is going well. We repurposed our Stockbridge distribution center here also to support the accelerated demand. I would say if you were to check out online with us today, we will tell you that it will take us some portion of 10 to 18 business days to deliver your product. And typically, we like to deliver it within a week. Depending on where you live in the country, you should see the product within a week. 10 to 18 days is long.

It’s not outside the scope of the experience that some of our competitors are also providing to their customers. It’s longer than we like, but we’re going to continue to prioritize safety over speed. So we’ve probably got some portion of about 400 people working up in the Braselton distribution center. That’s the primary e-Commerce fulfillment center. And that will ramp up. So my guess is it will probably take us until some portion of early to mid-June for us to get back to a level of speed of delivery consistent with our historical standards. So it will be slower, but we’re going to focus on safety of those workers over the speed of delivery for the time being.

[Susan Anderson, B. Riley FBR]

Great. That’s helpful. And then just one follow-up. Maybe if you could give some color just on the margins around the exclusive product within mass and, say, Amazon versus the department store product or the product in your own stores. How should we think about that margin difference there is? Obviously, the demand through the mass channel where the stores are open and then Amazon is higher currently.

[Michael Casey, Chairman and Chief Executive Officer]

Yes. Here’s – I won’t give you by a different customer. But I think the important thing for you to know, our exclusive brands are dilutive on the gross margin line item. They are accretive to operating margin. Those are highly profitable brands for us. Given the nature of who we’re selling them to, lower initial margin, but accretive to our operating margin.

[Susan Anderson, B. Riley FBR]

Great. That’s helpful. Thanks so much. Good luck in second quarter.

[Operator]

And we’ll move on to John Morris with D.A Davidson.

[John Morris, D.A Davidson]

Thanks. Good morning, everybody. I hope everybody is well. I wanted to ask, I guess, a question for Richard, first. Unless I missed it or if you can – you guys are doing a great job with respect to cost savings, contingency planning. I think you were on this pretty early on when we saw the crisis coming. Can you map out for us what kind of cost savings in total? And again, unless I missed it, cost savings in total, you might be shooting for between now and the end of the year into the beginning of next year? And how that might play out by play out by quarter? Thanks.

[Richard Westenberger]

John, I would say it’s been a comprehensive agenda of things that we looked at both on liquidity and just absolute expense reduction. As I think is summarized in the materials this morning, all of those actions cumulatively have improved our liquidity outlook by over $1 billion for the balance of the year. So it’s been meaningful. On the liquidity front, it’s been a combination of extending our payment terms. It’s been drawing on the revolver. It’s been suspending our return of capital programs. On the expense management front, I’d say, one of the more significant actions we took was on compensation, as I mentioned, directionally. We’ve reduced our compensation expenses by 20% or so, which is $100-ish million of a number across its various components.

We are looking to augment that cost reduction agenda further as we move forward through the year. I won’t put a number on that, but it is a focus of the team, obviously, to look at all of our discretionary spending. We’ve already pulled back on spending in numerous categories even beyond compensation, marketing, travel, of course, all the things that we’re able to get our hands around. And we will be very thoughtful as we turn the business back on, the costs we bleed back into the business as we rebuild the cost structure because what we can control is what we’re spending on, we have less control over how the demand profile recovers in the balance of the year. So we’ll be very, very thoughtful. We’ll be as aggressive as we can in controlling the costs.

[John Morris, D.A Davidson]

So I – make sure I understand that a little bit better just in terms of the expense management side and the kind of help I can give you on the SG&A line, even though you may be hiring more people back, understanding a big piece of that might be more in some of the labor savings, but hiring some of them back. So far, it’s about $100 million. But with puts and takes, obviously, the labor portion may go back up now, but you’re going to augment that further. So the $100 million on a net basis may continue to increase over the next multiple quarters. Is that fair to say? So I’m understanding correctly, just thinking about the model?

[Richard Westenberger]

Yes. I think, in general, we are going to seek to find additional sources of cost productivity over the balance of the year just to shore up the P&L and give us our – the best chance we can as the demand recovers.

[John Morris, D.A Davidson]

Got it. Thanks, and yes, good luck is we look ahead towards fall. Thank you.

[Operator]

And that will conclude today’s question-and-answer session. At this time, I would like to turn the call back over to Mr. Michael Casey for any additional or closing remarks.

[Michael Casey, Chairman and Chief Executive Officer]

Okay. Thanks very much. Well, we appreciate you joining us on the call this morning. We’ll update you again on our progress in July. Until then, wish you and all your families the best in the months ahead. Good bye everybody.

[Operator]

And that will conclude today’s call. We thank you for your participation.