Carter's Inc

NYSE:CRI

Earnings Call Analysis

Carter's Q3 Performance Shows Resilience Amid Market Challenges

In Q3, Carter's reported net sales of $758 million, a 4% decline from the previous year but exceeding guidance. Adjusted earnings per share were $1.64, down 11%. A robust performance in U.S. Retail, with improved trends, saw comp sales decline less than 5% in October. The company invested $40 million in pricing and $10 million in marketing to boost retail sales. Guidance for full-year sales is between $2.785 and $2.825 billion. Looking ahead, Q4 forecasts indicate net sales of $800-$840 million and expected EPS between $1.32 and $1.72, reflecting cautious optimism amid ongoing economic pressures.

Overview of Third Quarter Performance

In the third quarter, Carter's reported consolidated net sales of $758 million, a decrease of 4% compared to the previous year. Despite lower sales in their U.S. Retail and International segments, the U.S. Wholesale business remained stable. Operating income was $77 million, resulting in an operating margin of 10.2%. Adjusted earnings per share were $1.64, down 11% from the previous year, primarily due to lower sales and changes in operating income.

Improvements in Operations and Cost Management

Carter's demonstrated sound cost control measures, with net interest expenses decreasing by approximately $3 million due to lower borrowings. The effective tax rate improved to 17.5%, significantly lower than the previous year, reflecting a more favorable income mix between U.S. and international operations. The plan to maintain gross margins included investments in pricing and marketing strategies, amounting to $60 million in the second half of the year.

Gross Margin and Pricing Strategy

The gross profit margin dropped to 46.9%, down 60 basis points year-over-year. This decline was influenced by pricing investments and higher inbound costs. In response, Carter's focused on competitive pricing for basic products, aiming to improve retail sales performance, even if it meant sacrificing some margin. They anticipated approximately $25 million in pricing investments for both the third and fourth quarters.

Retail Sales Trends and Consumer Demand

Carter's acknowledged challenges in the retail sector, citing inflation and interest rates affecting families with young children. From the start of the quarter, the U.S. Retail comparable sales trend changed, improving from a significant downtrend earlier in the summer. The company reported an average decline of down 7% in U.S. Retail, but noted positive momentum due to Labor Day sales and a general improvement into the fourth quarter.

Future Sales Guidance and Market Risks

Looking ahead, Carter's maintained its guidance for full-year sales in the range of $2.785 billion to $2.825 billion, expecting adjusted operating income of $240 million to $260 million. They guided fourth-quarter net sales to be between $800 million and $840 million, with U.S. Retail sales anticipated to decline in the high single digits to low double digits. They highlighted risks from macroeconomic conditions and consumer confidence, particularly amid the ongoing election.

International and Wholesale Performance

International sales were down 9%, largely impacted by delayed cooler weather in Canada, with expectations of future recovery. The U.S. Wholesale segment remained steady, anticipated to grow in the mid-single digits, underpinned by strong demand for exclusive brands sold through major retailers. However, declines were noted in sales to department stores, shifting towards exclusive partnerships.

Capital Management Strategy

Carter's reported a strong liquidity position with over $1 billion available, enabling investment in new stores and technology. Year-to-date capital expenditures reached $40 million, with plans to increase to $65 million for the year. The company paused share repurchases to focus on dividend disbursement, exceeding projected free cash flow expectations while considering long-term capital allocation strategies.

Conclusion and Strategic Focus

In summary, Carter's is adjusting to market conditions through strategic pricing, controlled spending, and product assortment shifts, while maintaining a strong liquidity foundation. With a downturn in sales due to external pressures, the company hopes to tap into recovery trends as the holiday season approaches, focusing on customer acquisition and retention moving forward.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to Carter's Third Quarter Fiscal 2024 Earnings Conference Call. On the call are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Chief Financial Officer and Chief Operating Officer; Kendra Krugman, Chief Creative and Growth Officer; and Sean McHugh, Treasurer. Please note that today's call is being recorded.

I'll now turn the call over to Mr. McHugh.

[Sean McHugh, executive]

Thank you, and good morning, everyone. We issued our third quarter 2024 earnings release earlier today. The release and presentation materials for today's call are available on our Investor Relations website at ir.carters.com. Note that statements on today's call about items such as the company's outlook and plans are forward-looking statements.

For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please see our most recent SEC filings and the earnings release and presentation materials posted on our website. In these materials, you will also find reconciliations of various non-GAAP financial measurements referenced during this call. After today's prepared remarks, we will take questions as time allows.

I will now turn the call over to Mike.

[Michael Casey, executive]

Good. Thanks, Sean. 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. Our third quarter results were better than forecasted. Our sales and earnings exceeded the high end of the guidance we shared with you in July. We believe consumers responded favorably to the strength of our product offerings and our new pricing and marketing strategies launched in the third quarter.

The better-than-forecasted sales were driven by our U.S. Retail segment. Our U.S. Wholesale sales in the third quarter were at the upper end of our forecast, and our International sales were at the lower end of our forecast, reflecting a slow start to cooler weather apparel sales in Canada. Earnings in the third quarter were well above the high end of our guidance. Gross profit was in line with our forecast. SG&A was lower, reflecting good control over discretionary spending.

Inventory levels and cash flow were better than planned. We ended the quarter with a higher cash balance, no seasonal borrowings, lower interest costs and over $1 billion in liquidity. Our best-selling product offering continued to be in our Baby age segment. Baby apparel sales grew 2% in the quarter compared to last year and contributed over 50% of our total apparel sales. We saw slightly lower sales in the Toddler age segment.

Collectively, our Baby and Toddler apparel sales contributed over 80% of our total apparel sales and were comparable to last year. We had a double-digit decrease in sales in our apparel for 4- to 10-year-old children. It's largely a playwear product offering and contributed less than 20% of our apparel sales.

We believe we have strengthened this component of our product offering for 2025. In the context of our good, better and best product offerings, we continue to see a barbell-shaped trend in our U.S. Retail sales in the third quarter. We saw low single-digit sales growth in our opening price point product offerings. We had over 50% growth in our best product offerings, including our Little Planet, PurelySoft and Baby B'Gosh collections. Sales of our mid-tiered product offerings were down over 10%. We saw lower sales on bestsellers carried over from last year, and we saw higher sales where we offered fresh color stories, new multicolored prints and elevated fabrics.

Shopping for holiday-related apparel trended later than last year. We believe consumers are shopping closer to need and buying what's needed and only when needed. In recent weeks, thankfully, as weather turned cooler in more parts of the country, the trend in our holiday-related apparel has improved. Relative to last year, our third quarter sales were down 4%, reflecting a 5% reduction in average prices and a 1% increase in unit volume. That's the best unit volume performance we've achieved since 2021.

At the end of July, we announced a plan to invest $40 million in lower prices and $10 million in additional brand marketing to improve the trend in our U.S. Retail sales. Year-to-date through July, our comparable U.S. Retail sales were trending down about 10%, including a 13% decrease in July. We focused our price reductions on less than 20% of our product offerings, largely opening price point products, which are typically basket starters like our basic t-shirts, shorts and leggings. We'll show you examples of where we lowered prices, and we'll discuss the related benefits this morning. We believe consumers responded favorably to those sharper prices.

Our comparable U.S. Retail sales in August and September were down about 5%. Fourth quarter-to-date, our comparable Retail sales are trending down about 4%. Collectively, we believe our investments in product benefits, price, marketing and a better in-store and online shopping experience have improved the trend in our conversion rates, transactions, unit volume and new customer acquisition. We're pleased with the near-term benefit from these investments. Longer term, we believe there may be a more meaningful benefit as we reengage and attract consumers who shifted over to the mass channel and off-price retailers as inflation reached historic levels beginning in 2022.

The results of recent market analysis were consistent with our experience over the past 2 years. It indicated that millennials and Gen Z consumers, our Target demographic shifted to value apparel retailers beginning midyear 2022. The research indicated that although apparel prices had grown only 5% since 2019, other cost of living, including grocery prices up 30%, drove them to value apparel retailers. Carter's is a value apparel retailer. Our average prices per piece are about $6 and change. In the third quarter, we believe more competitive prices enabled our U.S. Retail unit volume to be comparable to last year.

By comparison, Retail units sold in the first half this year were down 6%. We plan to continue to seek the sweet spot in pricing to drive growth in unit volume and plan to be less reliant on higher prices near term to drive growth. In the third quarter, we launched a new marketing campaign focused on the beauty of our product offerings and the special moments of early childhood. We'll share some of that brand marketing with you this morning. We believe our brand marketing is resonating with consumers. We saw a lift in new customers in the third quarter.

We also saw an increase in reactivated customers returning to shop with us after more than a year since their last purchase. With our better-than-forecasted third quarter results, we are reaffirming our previous outlook for annual sales and profitability this year. If current Retail trends in the United States continue, we may have upside to our guidance. That said, we believe the potential upside opportunities in the fourth quarter may be offset by market-related risks to our forecast. At the high end of our guidance, we are forecasting annual sales of $2.8 billion this year. Our U.S. Retail business is expected to contribute about 50% of our annual sales.

We're assuming our Retail sales this year will be down about 8%, store sales down 6%, e-commerce sales down 10%. We believe in the importance of stores as the very best expression of our brands. Nearly 70% of children's apparel is purchased in stores, and our stores are the #1 source of new customer acquisition. We believe our stores drive our e-commerce sales. When we open stores, we see a lift in e-commerce sales. And when we close stores, we see e-commerce sales in the related market decrease.

Increasingly, consumers enjoy the convenience of shopping online and picking up their purchase the same day in our stores. We saw a 12% lift in omnichannel sales in the third quarter. Omnichannel sales include the store fulfillment of online purchases. About 38% of our digital orders were supported by our stores, up from 35% last year. These are margin-accretive transactions and reduce the need for shipping online purchases to consumers. Initiatives to improve our store performance include opening 40 high-margin stores this year in good shopping centers and closing about 30 low-margin stores in declining traffic centers as leases expire.

98% of our stores were cash flow positive over the past 12 months. Our new stores continue to comp better than our older stores. To improve the performance of our older stores, we have increased our investments in store remodels this year. To improve our U.S. Retail performance, we are responding to the barbell pattern in consumer purchases by increasing the mix of our opening price and premium-priced product offerings. We have invested in technology to improve our performance, including a new inventory allocation system to better support the expectations of consumers shopping with us in our stores from Maine to Hawaii.

And we have also invested in new marketing personalization technology enabled by artificial intelligence to tailor our digital marketing to consumers' product preferences based on the age and gender of their child. For the year, we are forecasting U.S. Wholesale sales of over $1 billion. The strength of our Wholesale business continues to be in our exclusive brands sold to mass channel retailers. Carter's has an unparalleled competitive advantage as the largest supplier of children's apparel to Target, Walmart and Amazon. Collectively, our unit volume to these retailers in the first 9 months this year was up about 15%. By comparison, the unit volume in our U.S. Retail segment was down 4%.

With inflation weighing on families with young children, we believe our Target consumers have sought the convenience that mass channel retailers provide with one-stop shopping for groceries, diapers, baby formula and children's apparel. Carter's has benefited from that traffic to mass channel retailers. Our exclusive brands are forecasted to grow to 55% of our total U.S. Wholesale sales this year, up from 51% last year. By comparison, our sales to department stores this year are forecasted to be less than 20% of our Wholesale sales, down 3 percentage points to last year.

For the year, we are also forecasting lower sales to off-price retailers. With our progress managing inventories, we are forecasting a nearly 50% reduction in low-margin off-price sales this year. Excluding off-price sales, we are forecasting low single-digit growth in our U.S. Wholesale sales this year. To date, we have received bookings, which indicate modest growth in Wholesale demand for our brands for our spring and summer 2025 product offerings.

Our International sales this year are expected to contribute about 14% of Carter's annual sales or a little over $400 million. Our operations in Canada and Mexico are expected to contribute over 80% of our International sales. We're forecasting high single-digit growth in Mexico this year. By comparison, in Canada, we're forecasting a high single-digit decrease in sales. The Bank of Canada has cut interest rates 4x this year to strengthen the economy. Like the United States, families with young children have been weighed down by inflation and higher interest rates.

That said, we're encouraged by recent trends in Canada with cooler weather arriving, our Retail sales in Canada are comping positive in the fourth quarter. Our supply chain continued to be a source of strength for us in the quarter. Product costs were down 5%, down 7% year-to-date. Shipments to our Wholesale customers and our stores were largely on time despite unrest in Bangladesh, a port strike on the East Coast and rerouting of ships to avoid the Red Sea. We're forecasting a low single-digit decrease in product costs in the fourth quarter. The early read on product costs for the first half of 2025 suggests modest inflation.

Our market research suggests consumers plan to increase the mix of apparel purchases for their holiday gift giving this year. Our market research also continues to indicate that families with young children have pulled back on spending due to inflation. Children's apparel is a relatively small component of a young family's budget, but even less discretionary purchases like children's apparel have been scaled back because of inflation. We believe that Carter's advantages in inflationary markets include our focus on essential core products, a high mix of less discretionary baby apparel, our broad and unparalleled market distribution capabilities, including our exclusive brands sold through Target, Walmart and Amazon, and our compelling value proposition with average retail price points of less than $11, including many high-value multipacks.

Our growth strategies are focused on the fundamentals, including elevating the style and value of our product offerings, improving our marketing capabilities and effectiveness and leveraging our unparalleled multichannel market presence to ensure wherever children's apparel is sold in a meaningful way, consumers will have a good experience with our brands. We'll share our thoughts on each of these growth strategies with you this morning. I want to thank all of our employees, many tuning in this morning for helping us exceed our third quarter plans and their commitment to achieve our growth objectives in the home stretch this year.

At this time, Richard and Kendra will walk us through the presentation on our website.

[Richard Westenberger, executive]

Thank you, Mike. Good morning, everyone. On Pages 3 and 4 of our presentation, we've included our GAAP basis P&Ls for the third quarter and year-to-date periods. On Page 5, we've summarized non-GAAP adjustments to our reported results. This year's third quarter results included a noncash charge related to the partial settlement of a legacy OshKosh B'Gosh Pension Plan and last year's third quarter and year-to-date results included charges related to organizational restructuring.

I'll speak to our results on an adjusted basis this morning, which excludes these items. Turning to Page 6. We have a summary of our third quarter performance relative to the guidance we provided on our last call in July. As Mike noted, we exceeded our sales and earnings objectives for the third quarter. Our consolidated net sales were above our guidance as a result of better comparable sales in our U.S Retail business.

Earnings were also higher than our guidance, driven by higher sales, lower spending, lower net interest costs and a lower effective tax rate. Turning to Page 7 and some highlights of our third quarter performance. Net sales were $758 million in the quarter, down 4% versus last year. We had lower sales in our U.S. Retail and International segments, while sales in our U.S. Wholesale business were essentially comparable to last year. Operating income was $77 million at an operating margin of 10.2%. I'll speak to the components of operating margin in a moment.

Adjusted earnings per share were $1.64, down 11% from last year, less than the year-over-year decline in operating income as a result of lower net interest expense on lower borrowings, a lower effective tax rate and fewer average shares outstanding due to our share repurchases.

On Page 8, we have our consolidated P&L for the third quarter. On our nearly $760 million in net sales, gross profit in the third quarter was $356 million, down 5% from last year, and gross margin was 46.9%, a decline of 60 basis points versus last year. The lower gross margin rate was driven by several factors, including price investments in our U.S. Retail business, a higher mix of lower gross margin U.S. Wholesale sales and higher inbound freight costs. Last year's gross margin benefited from the release of inventory reserves as we successfully sold through pack and hold inventory, and that benefit did not repeat this year.

Product input costs were favorable in the third quarter, which partly offset some of these gross margin headwinds. As Mike described, we made some targeted pricing investments in the third quarter to increase the competitiveness of some of our opening price point products and to move through prior-season inventory. These pricing actions affected consolidated gross margin by approximately 170 basis points, but we view them as enabling the improvement in Retail sales we achieved in the third quarter. Spending was well controlled in the quarter and was comparable to last year.

We invested more in brand marketing and had lower spending on professional fees and lower provisions for performance-based compensation. SG&A as a percent of sales was up 140 basis points compared to last year, largely due to fixed cost deleverage on lower sales. And as discussed, third quarter operating income was $77 million and our operating margin was 10.2%. Below the line, net interest and other costs were about $3 million less than last year, driven by higher interest income and lower interest costs as we've had no seasonal borrowings outstanding on our credit facility this year.

Our effective tax rate was 17.5%, 500 basis points lower than last year, and as I mentioned, lower than we had forecasted in July. This lower rate reflected favorable resolution of prior-period tax items and our expectation for U.S.-based income to represent a lower proportion of our full year earnings relative to income expected to be earned outside of the United States. For the full year, we're expecting an effective tax rate of about 21% compared to just over 23% in 2023.

Our average share count was 3% lower than last year, reflecting the benefit of share repurchases. So again, on the bottom line, adjusted earnings per share in the third quarter were $1.64 compared to $1.84 last year. Pages 9 and 10 include summaries of our year-to-date performance, which we've included for your reference. Year-to-date net sales decreased 5% with roughly 70% of the decrease driven by lower traffic and sales in our U.S. Retail business. Year-to-date operating income declined 11% on the lower sales. And given lower borrowing costs, a lower effective tax rate and lower share count, adjusted earnings per share were down only about 1% in the year-to-date period versus last year. Our third quarter business segment results are summarized on Page 12. Third quarter sales were $33 million lower than last year with our Retail business and to a lesser extent, our International business driving the decline.

U.S. Wholesale sales were comparable to last year. Operating income declined $19 million, largely due to lower sales year-over-year and the pricing and marketing investments in our U.S. Retail business. Third quarter corporate expenses declined by $8 million or 26%, principally due to lower professional fees and lower provisions for performance-based compensation. Beginning on Page 13, we've provided additional detail on our business segment performance in the third quarter. Sales in our U.S. Retail business declined 6%.

We believe a number of factors, including inflation and higher interest rates continue to weigh on demand from families with young children. As Mike said, after a slow start to Retail comps of down 13% in July, our Retail business strengthened as we moved through August and September and improved demand has continued through October as we've started the fourth quarter. We had particularly successful Labor Day selling, achieving a positive comp, which represented our best holiday sales performance this year. Business slowed the last 2 weeks of September, we believe, due to warmer weather around the country and the impact of Hurricane Helene in the Southeast, one of our largest markets.

For the third quarter in total, U.S. Retail posted a down 7% comp, which was a notable improvement from the down 12% comp in Q2 and the down 9% for the first half of the year. We saw a particular inflection in trend in the e-commerce portion of the business. E-commerce comps down 14% in the first half, which improved to a comp decline of 5% in the third quarter. And e-commerce comps in October have continued to improve. We're currently running a low single-digit positive e-commerce comp fourth quarter-to-date.

U.S. Retail operating margin was 7.7% in the quarter compared to 13% a year ago. A good portion of our investment in price reductions was covered by the benefit of lower product costs in the quarter. The balance of the reduction in Retail's operating margin was driven by expense deleverage from the relatively high fixed cost structure in the Retail business and higher spending on marketing and new stores. We believe our investments in sharper pricing and additional brand marketing have driven good results for us. As mentioned, we've seen a change in our comparable sales trend in the U.S. over the last few months.

The trend improvement has been stronger to date online than in stores, but we would expect longer term to see improved traffic in the stores as well. Importantly, we believe these investments have helped to improve customer acquisition and retention. Improving our customer counts is important for driving longer-term sales growth and increasing the lifetime value of consumers shopping with us. The pricing action geared towards reducing prior-season inventory was also successful with spring/summer units down about 65% from the level we had on hand coming into the third quarter.

Given the success we saw with our targeted price reductions, particularly in reducing prior-season goods, we've leaned a bit more into investment there than originally contemplated. Our revised forecast reflects a total second half investment in pricing and marketing of roughly $60 million, about $10 million higher than we had shared on our last call with that incremental amount directed towards pricing. Turning to Page 14 and third quarter results in Wholesale and International. Third quarter sales in our U.S. Wholesale business were comparable to last year, as I've said, we posted good growth in our exclusive brands and lower sales to department store customers and had a meaningful reduction in low-margin off-price channel sales. U.S. Wholesale delivered a strong operating margin of over 21%, down 90 basis points compared to last year. While product costs were lower year-over-year, Wholesale margins declined mostly due to higher inbound transportation costs and the absence of favorable changes in inventory reserves, which benefited last year's third quarter.

In our International segment, third quarter sales declined 9% on a reported basis and 6% on a constant currency basis. In Canada, the largest component of our International business, consumers continue to be negatively affected by higher mortgage interest rates and higher unemployment. This time of year, our Canadian business tends to be weighted towards colder weather outfitting.

Weather was warmer in Canada this year, particularly in September, which we believe pushed out demand for this product. Demand trends in Canada have improved in October with the arrival of more consistent colder weather. We continue to have good momentum in Mexico. Retail comps grew 9% in the third quarter with growth in both stores and online. Unfavorable movements in currency exchange rates reduced the contribution of this strong growth in Mexico in our U.S. dollar P&L. Sales to Wholesale partners outside of North America declined versus last year in Europe and in the Middle East, given ongoing conflicts in that part of the world and due to changes in timing of shipments to our partner in Brazil.

International segment margin was 9.6% compared to 11.7% last year. This decline reflects fixed cost deleverage, lower pricing and higher transportation costs that were offset in part by lower product costs. On Page 15, we've included for your reference, information on our year-to-date business segment performance. Now to some balance sheet and cash flow highlights on Page 16. Our balance sheet remains very strong with over $1 billion in liquidity at the end of the quarter. We have good cash on hand and virtually all of the borrowing capacity under our credit facility available to us.

Third quarter inventories declined 2% compared to last year. The quality of our inventory at the end of the third quarter was high. A year ago, we were carrying $44 million in pack and hold inventory, which we've successfully sold through at good margins. Year-to-date operating cash flow was $11 million compared to $206 million last year. The change in cash flow reflects a more significant reduction in inventory last year as we sold through that pack and hold inventory. For the full year, we're forecasting operating cash flow in excess of $200 million.

Our outlook for good cash flow and ample liquidity has supported continued investments in the business. Year-to-date CapEx was $40 million. And for the full year, we're planning CapEx of approximately $65 million, principally on new stores, store remodels and technology and distribution center initiatives. Through the third quarter this year, we have returned $138 million to our shareholders through dividends and share repurchases. Our plans for return of capital are anchored to our outlook for free cash flow. To better align our planned return of capital to our latest view on free cash flow, we've paused share repurchases for now.

In light of the $51 million we've completed in share repurchases year-to-date and our projected remaining dividend payments this year, we expect we will distribute somewhat more than 100% of our projected full year free cash flow. We regularly discuss capital allocation and the return of capital with our Board, and we'll continue to do that, particularly as we firm up our forward forecast for cash generation for 2025 and beyond.

And now I'll turn the call over to Kendra for an update on our progress with our product and growth strategies.

[Kendra Krugman, executive]

Thank you, Richard. Turning to Page 18. Through the hard work of our teams, commitment to innovation and focus on our 3 growth strategies, we are realizing positive momentum in our business. Those growth strategies are grounded in our product, delivering on our customers' expectations of style and value, our unparalleled brand reach, where we are improving our experience across 20,000 points of distribution globally and our marketing focused on acquiring new customers and deepening our connections with our existing customers.

Starting on Page 19 with an update on our product strategies. Informed by consumer demand and insights, we started a meaningful shift of our retail product assortment in Q3. Over the next year, we will increase by 10 points of penetration each our opening price product and our best more premium fashion assortment. As Mike mentioned, both our opening priced and best categories are delivering positive comp increases. Even with this shift, a significant portion of our business resides in our better mid-tier product assortments where opportunity still remains to improve our style and value proposition.

Page 20 illustrates the Retail price investment we've made to be more competitive in select opening priced categories, where we see the least price elasticity and the products are less differentiated from private label brands. These items are basket starters and represent less than 20% of our assortment, primarily in the Toddler and Kids size segments. As an example, our opening priced t-shirts and leggings last year would have been priced at $6. This year, they were sharply priced at $5. As mentioned, this targeted strategy informed by our enhanced pricing capabilities is helping to drive an increase in conversion and units per transaction in stores and e-commerce versus last year, with e-commerce realizing mid-single-digit increases in both metrics.

Featured on Pages 21 and 22, we continue to realize growth in our more premium brands and collections of products. The meaningful shift to double the penetration of our best product is supported by our house-of-brand strategy that enables us to leverage our new, more targeted and differentiated brands like Little Planet and PurelySoft as well as our curated collections from Oshkosh B'Gosh, Skip Hop and Carter's. Sales in our best assortment have significantly outpaced inventory throughout the year and are effectively driving an increase in new customers who are younger, spend more on apparel and have higher income.

As an example, customers who buy our Little Planet brand, who most often also buy our other brands, have a lifetime value 50% greater than our average customer. We have a comprehensive strategy to retain these valuable multi-brand customers with personalized marketing tactics as well as new brands and assortments launching in the near term.

Additionally, Page 23 highlights some of our top-selling styles from this back-to-school season, including fashion denim, statement outerwear and trending skirts for girl.

Our talented product teams are responding more quickly to consumer demand, which are increasingly leaning towards fashion and style. Turning to Page 24. Today's parents shop at an average of 6 retailers for their children's clothes. Thanks to our incredible relationships with top retailers and our over 1,000 North American retail stores, parents can find our brands nearly everywhere they are shopping. Across our retail fleet, we've made significant progress over the last year to test new formats and accelerate remodels.

Our newly remodeled stores are providing an updated, more on-brand customer experience and are delivering a meaningful sales trend improvement, heightened customer satisfaction scores and an increase in reactivated customers. Highlighted on Pages 25 and 26, this week, we opened our first-ever flagship store in the heart of Atlanta's Buckhead neighborhood. This nearly 9,000 square foot store experience was informed by consumer insights and includes inspiring brand-centric presentations, in-store shops for Baby, Toddler and Kids, modern digital displays a gifting station and community engagement events throughout the year.

Learnings from the ongoing innovations at our flagship store will inspire our new and remodeled store experiences across our fleet. Turning to Page 27. In Wholesale, one of our most important growth strategies is our brand reach enabled by our long-standing relationship with retailers like Kohl's, Walmart, Target and Amazon. These partnerships are significant contributors to not only our sales and profitability, but also to our consumer brand awareness. We will continue to prioritize investments in our brand experiences with our Wholesale partners, both digitally and in-store.

Finally, on Page 28, we move into our third strategic priority, deepening our relationship with consumers through marketing. We are investing in data-driven customer-first personalization tools and initiatives. These investments are yielding a positive response with continued growth expected as we better connect the digital and store experience for our customers.

On Page 29, our new brand marketing campaign launched earlier this fall is driving relevance and receiving strong consumer engagement across every touch point. Additionally, our incremental marketing investment is delivering double-digit trend improvements in our media-driven e-commerce traffic, customer acquisition and customer reactivation.

We are leveraging new marketing technology and capabilities to dynamically shift our spend into the most productive media channels. On Page 30 and in summary, our strategic focus on product, brand reach and marketing is driving positive trend changes in our business, including market share growth in our most important Baby and Toddler segments, growth in unit sales for the first full quarter following a period of decline that started in 2021, all while sustaining our long-held top position as the most trusted and most recommended brand in young children's apparel.

Relative to the first half, U.S. Retail trends have strengthened, including comp trend improvement and most notably versus July, we have maintained an over 8-point improvement that is carrying into October, increases in our conversion rates and units per transaction, growth in new customers and upward momentum in customer retention, and we maintain our industry-leading customer satisfaction scores.

We look forward to sharing more on our progress in the new year. Richard will now cover our financial outlook.

[Richard Westenberger, executive]

Thank you, Kendra. Our expectations for the full year are summarized on Page 32. As noted in today's press release, we are reaffirming our previous full year outlook for net sales and operating income. We continue to expect full year net sales in the range of $2.785 billion to $2.825 billion. We're planning lower sales in U.S. Retail and International with U.S. Wholesale sales comparable to up in the low single-digit range. We're expecting adjusted operating income in the range of $240 million to $260 million.

We've raised our previous expectations for adjusted earnings per share by $0.10 to $4.70 to $5.15 to reflect a lower effective tax rate and lower net interest expense than we had previously planned. Turning to Page 33 and our outlook for the fourth quarter. We're planning net sales in the range of $800 million to $840 million. In U.S. Retail, we're planning total sales down in the high single digits to down low double digits. We have maintained our prior guidance of a comp sales decline of 9% to 12%. Our down 7% Retail comp in the third quarter was obviously better than this.

As Mike said, comps in October are currently running down less than 5%. If this trend continues in the more significant months of November and December, then perhaps we could have some upside to these forecasts. In U.S. Wholesale, we're planning sales up in the mid-single digits to high single digits compared to last year, driven by growth in our exclusive brands.

In International, we're planning fourth quarter sales down in the mid- to high single-digit range. Canada is driving the majority of the planned decline in International sales, more on the Wholesale side of the business in that market. As I've said, we've seen an improving trend in our Retail business in Canada, which represents the majority of the business, especially since the arrival of colder weather in October. With respect to profitability, we're planning adjusted operating income in the range of $70 million to $90 million and adjusted EPS in the range of $1.32 to $1.72.

We're monitoring several risks, including consumer demand and confidence in the context of the upcoming election. In past years, we've seen some temporary disruption to demand around presidential elections. We're also monitoring the ongoing impact of macroeconomic conditions on families with young children and the degree of promotional intensity across the marketplace. And with these remarks, we're ready to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Ike Boruchow from Wells Fargo.

[Irwin Boruchow, analyst]

I wanted to ask about the gross margins in relation to the pricing strategies you guys are implementing. So the strategies were implemented, and I believe if I'm understanding this correctly, it was basically $30 million in 3Q and $30 million in 4Q in terms of like brand investment. But the gross margin decline in 3Q was better and only down 60. But to get to your kind of full year guide, it looks like the grosses are going to be down somewhere around 300 basis points in 4Q.

So just trying to understand how to kind of like look at 3Q in relation to 4Q and why there would be so much more pressure if the price investment in dollars is similar and how much pricing -- just how to think about the promo versus the comp and how you're weighing that?

[Richard Westenberger, executive]

Sure. So I would say the pricing investment in U.S. Retail was closer to that $25 million number in third quarter, Ike, and a similar amount, to your point, earmarked for the fourth quarter. you do have a fairly significant mix effect that's different between the fourth quarter and the third quarter. And I think that's a reasonably consistent forecast assumption for us.

All along, we have planned for very nice growth in Wholesale. That is the lower gross margin part of the business. So that is one key difference between Q3 and Q4. I wouldn't say we're planning gross margins down 300 basis points, probably close to 200 basis points, but fairly consistent pricing investment in U.S. Retail, $25 million each of the third and fourth quarters.

[Irwin Boruchow, analyst]

But is it fair to say, Richard, that you're on promo or discount or pricing, whatever, however you want to characterize it, is that going to be deeper in the fourth quarter relative to what you're doing during Labor Day in the third quarter?

[Michael Casey, executive]

Typically, Ike, in the holidays with Black Friday, year-over-year typically tends to be more promotional. I think the big progress we made in the third quarter was knocking down the prior-season goods, spring and summer. Our prices on the prior-season goods were down about 10% in the third quarter. On the in-season goods, where we got sharper, just more competitive on certain key items, prices were only down about 3%.

But we made very good progress moving through the prior-season goods, which puts the inventory position heading into the balance of this year in better shape than it otherwise would have been.

[Operator]

Our next question comes from the line of Jay Sole from UBS.

[Jay Sole, analyst]

Terrific. My question is just about how the compares on the U.S. Retail side look post October. In other words, like what are you lapping versus last year in November and December? And then I have a follow-up after that.

[Michael Casey, executive]

In terms of comp changes, easier comparison, tougher comparisons?

[Jay Sole, analyst]

Yes.

[Michael Casey, executive]

So looking at fourth quarter last year, comps were down around 6%, and we're planning them down somewhere in the range of 9% to 12%. So again, it's that comp was probably one of the better comps we had in the fourth quarter last year relative to the previous 3 quarters last year. So we had a good fourth quarter. Typically, we have a good fourth quarter. Christmas is a kids holiday. And given our value proposition, the low price points, people are out buying their Christmas pajamas in the fourth quarter. So we're -- we hope there's more upside than downside relative to our U.S. Retail guidance in the fourth quarter given current trends.

[Jay Sole, analyst]

Understood. Mike, if I could follow up on that. A little bit different question, but how do we judge the ROI of the pricing investments? And how are you judging it?

[Michael Casey, executive]

Return to growth in unit volume. We've been losing ground in unit volume. The whole focus of these pricing strategies and marketing strategies are to reengage the consumer who swung over to mass channel and off-price retailers when inflation surged in 2022. That's where we started to lose ground.

Prior to the pandemic, we had 31 consecutive years of growth, had a strong recovery in 2021, '22 started off to be a good year. And then when inflation hit, consumers swung over to the mass channel and off-price retailers, trying to reengage them. And it seems as though some of the strategies, particularly online, we are reengaging that consumer. And we got sharper on prices starting in August and September because we felt as though we had widened, unintentionally widened the gap between our prices and the competition.

The first quarter this year started out good in the market. Second quarter got notably weaker. Consumer confidence dropped like a rock in the second quarter. Inflation in the first quarter was being described as moderating. Second quarter being described as sticky. Gas prices were trending higher. So we saw the market weaken in the second quarter. We saw our competitors dropping prices. They dropped prices because they needed to move through the goods and drive traffic to their stores because our inventory position was good in the second quarter, and we felt as though the product offering and the inventory position was in good shape.

We didn't participate in those deep discounts in the second quarter, but decided to take a different strategy in the second half, particularly we got beat Memorial Day in the 4th of July shopping holidays. We had growth in comparable sales in Labor Day, it had a very good Labor Day. So we see just by narrowing that spread, between our prices and private label competitors and other brands, the consumer responded to it, and we reengaged them.

The plan is to continue to reengage in the balance of the year and then decide what's the best strategy for 2025.

[Kendra Krugman, executive]

And Jay, I'd just to add to that, Mike mentioned our units. We want to see unit growth, but that is over the whole basket. So not only are these goods lifting with the reduced prices, but we're seeing these items be basket starters for her and then she's adding other items into her basket. So we're seeing a total UPT lift, not necessarily just in these items.

[Michael Casey, executive]

Yes. Transactions are up, conversion rates are better and the comp trends are better. So that's how we're measuring the return on investment.

[Operator]

Our next question comes from the line of Chris Nardone from Bank of America.

[Christopher Nardone, analyst]

How should we think about the $60 million in pricing and marketing efforts in the back half of this year as we move into the first half?

Should that stick around next year? And then just in terms of your pricing strategy, do you see risk that some of your competition could continue to get more promotional into next year? And how would you balance kind of maintaining your margins with also striving to improve the comp growth rate into 2025?

[Richard Westenberger, executive]

Yes. Keep in mind, Chris, that we -- a good portion of the pricing, at least to date has been focused on improving the mix. So I think the prior-season goods were probably some portion of 50% of our Retail inventories at the end of the second quarter. Today, they're closer to 10%. That's where you want it to be. prior-season goods, you want a better mix of fall and holiday product in the stores and not online at this time of year.

So if we continue to make sure that we manage inventory, we shouldn't see the level of promotions that we saw in the third quarter and some portion of the fourth quarter.

[Christopher Nardone, analyst]

Okay. And then just on your Wholesale business, as we think about the color you gave on your order book for spring/summer, how might that differ between your exclusive and nonexclusive partners?

[Richard Westenberger, executive]

We would expect better -- continue to expect better performance with the exclusive brands. That's where people are shopping these days. And we're benefiting from that. Go into Target, go into Walmart, you'll see probably the most dominant brand presence is the Carter's brand at both those retailers. So we're benefiting from that traffic. So we would expect that, that would continue to be a good source of performance for us in 2025.

[Operator]

Our next question comes from the line of Paul Lejuez from Citi.

[Paul Lejuez, analyst]

Sorry if I just missed this, but did you say if you expect the gross margin pressure that you're seeing in the fourth quarter to continue into the first half of next year? Should we expect the pricing investments? You seem happy with what it's doing from a unit perspective. So should we expect the price investments to continue through the first half?

And then again, should we expect a similar level of gross margin decline? Or maybe could it be a little worse? I think you mentioned there was some AC pressure as well in the spring season. So maybe if you could just talk about the outlook, first half gross margin?

[Richard Westenberger, executive]

Paul, I would say probably too early to comment on specific expectations for gross margin for next year. We'll share more of those plans for you on our February call.

What we've said in the past is that a number of product input costs continue to be favorable. Cotton, in particular, has been favorable that will -- our expectation, extend into next year. Labor continues to go up. Transportation costs are higher. So we are expecting in the first part of next year, that's what we have good line of sight to, I'd say, kind of modest low single-digit inflation in product cost.

That's kind of what we're expecting right now. We're still in the process of working through fall, so we don't have line of sight to that. But we'll give you our expectations for gross margin when we get on the February call.

[Michael Casey, executive]

And the opportunity, Paul, in the first half, if the consumer responds well to the spring and summer product offerings, best margin is on product selling well. So if we bought it right and it's selling through, that's the opportunity on the margin side in the first half of next year relative to what we experienced this past year.

[Paul Lejuez, analyst]

Got it. Got it. And then just can you talk about the sell-through rates at your 3 large Wholesale accounts and just what you're seeing there? And what were the drivers of the slightly lower Wholesale guidance for the year?

[Richard Westenberger, executive]

I would say on the Wholesale forecast, really 2 things. One, I'd say good continued momentum with the exclusive brands. We had replenishment demand planned up fairly considerably in the fourth quarter. We're still planning for very good growth in replenishment, just not quite at the level that we saw before. And I'd say a little air came out of the balloon in the department store group of customers, some orders moving to the right, a bit more in terms of order cancellations and their replenishment demand a bit down relative to our previous expectations. But those are the majority of the revisions.

[Michael Casey, executive]

And off-price sales were planned lower relative to what we thought in July.

[Richard Westenberger, executive]

Yes.

[Operator]

Our next question comes from the line of William Reuter from Bank of America.

[William Reuter, analyst]

My first on the pause of your share repo. Did you say for what time period you're putting this on pause? And I guess, is it just based upon paying out in excess of 100% of your free cash flow? And will that kind of always be the kind of the guardrails for share repo going forward?

[Richard Westenberger, executive]

So I think in recent years, we've used our forecast for free cash flow to guide the amount of distribution of capital that we make. We're fans of returning capital. So the pause relates more to the balance of this year. As I said, we continually talk about this with the Board. And as our plans come together for 2025 and beyond, we'll certainly revisit it.

But our forecast for free cash flow has come down a bit relative to our initial expectations coming into the year. We don't think it's appropriate to take on debt for the sole purpose of returning capital. And so since that forecast for free cash flow has come down a bit, we think it's appropriate to modify our return of capital plans. But we'll continue to revisit it.

[William Reuter, analyst]

Great. And then in terms of bigger picture, clearly, these price investments were meant to kind of seed or I guess, stop the seed of share to some of these lower price point private label products that you're seeing in mass. How do you feel that you did versus the category in the third quarter? I know data points can be somewhat limited, but based upon anything you can see, how do you think your share fared?

[Michael Casey, executive]

We gained share in Baby and Toddler apparel. That's over 80% of what we do for a living. So we're pleased with the results.

[Operator]

[Operator Instructions] our next question comes from the line of Jim Chartier from Monness, Crespi & Hardt.

[James Chartier, analyst]

I just wanted to ask about the assortment shift towards better and best and good. Is there a plan to go deeper on units in those parts of the assortment? Or are you adding additional products to the assortment?

[Kendra Krugman, executive]

Jim, this is Kendra. I would say it's both. So we will be investing more depth and breadth and particularly our best categories, leaning into our new brands and new assortments that fit there in the good bucket. I would say it's a little bit more depth than it is breadth, but it will be both.

[James Chartier, analyst]

Great. And then in terms of the pricing promotions this year, third quarter, was that primarily focused in the good part of the assortment? Or was there some of that -- or I guess, in the better part of the assortment? Or is there some of that in the good part as well?

[Kendra Krugman, executive]

It was almost entirely in the good portion of our assortment. So those are items like t-shirts, leggings, some other kind of stock-up basket starter items that are most competitively positioned against private label brands where there is little differentiation in the product and where we saw private label really go deep and low on those prices.

So it's mostly in the good bucket, almost entirely in the good bucket and mostly around Toddler and Kid assortments as well.

[Michael Casey, executive]

Yes. And Jim, just again, a refresher of what we saw in the second quarter because business generally slowed in apparel sales generally. We saw some competitors selling kind of basic products, t-shirts and shorts for $250 each. I would describe that as thrift store level pricing. And we didn't go down to that level, but we did narrow the gap between our pricing and our competitors' pricing.

Once that product cleared through, their prices came up. And I think another important thing to know, in some cases where we lowered prices, we didn't see the unit velocity, so we raised the price back up. So this isn't a one-way street. When we lowered it and we saw a noteworthy trend change in unit velocity, we stuck with those prices where we didn't see an improvement in unit velocity, we restored the pricing.

[James Chartier, analyst]

Okay. And then any gross margin implications from the mix shift next year? You're increasing the good assortment 10 percentage points. Is that going to be a headwind to gross margin next year?

[Kendra Krugman, executive]

The shift in product composition doesn't have a huge impact to our gross margin rate.

[Michael Casey, executive]

It should be a net benefit because the mid-tier isn't working because it's not working, particularly in that Older Age segment, 4 to 10, we had to get much more promotional to clear it out. The consumer just didn't see sufficient differentiation between the good, which is good-looking product and the best. It was -- it got caught in the middle and they opted for one and the other and not the mid-tier.

So we had to promote it. If we get the mix right, you'll have less pressure on the margin.

[Operator]

Our next question comes from the line of Carla Casella from JPMorgan.

[Carla Casella, analyst]

Just 2 follow-ups. And one you may have answered, but I dropped for a moment. Did you say the impact that the warmer fall weather we've had has on either the ending third quarter inventory or thoughts for a third quarter and whether there could be any clearance related to that?

[Richard Westenberger, executive]

Well, I would say we certainly always have a weather impact. It did warm up in the final 2 weeks of the quarter in the U.S. and in Canada, which slowed sales a bit. I would say though that over the course of the entire third quarter, we made very good progress moving through the spring and summer inventory, which would otherwise have been problematic going forward.

[Michael Casey, executive]

Yes. It's a natural stimulus every year. When that weather turns cooler in the second half of the year, we see a nice lift in sales. And then again, in the spring, when weather turns from cold to warm, we see a nice lift in sales. It always comes hard to predict with certainty when it comes, but we -- as weather turns cooler in more parts of the country, we've seen business trends improve.

[Carla Casella, analyst]

Okay. Great. And then just one question. Can you just remind us how much you import from China? And any thoughts you have on potential tariffs if Trump takes the White House?

[Michael Casey, executive]

Yes. So we've been diversifying the countries of origin over the probably the past 5 years or so. The amount of finished goods now coming out of China is less than 5%. So we've -- even our China-based suppliers have built capacity for us in Cambodia and Vietnam.

We've got first-class suppliers in India and Indonesia. So the exposure, I believe, to tariffs is significantly reduced relative to where we were, say, 5 years ago. The likelihood tariffs get put on children's apparel, I don't think that will be on the short list, but time will tell.

[Operator]

At this time, I would now like to turn the conference back over to Mr. Casey for closing. remarks.

[Michael Casey, executive]

Thanks very much. Thank you all for joining us this morning. We wish you all and all of your families a happy holiday season, and we look forward to updating you again on our progress in February. Goodbye, everybody.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.