Carter's Inc

NYSE:CRI

Earnings Call Transcript 2020-Q4

[Operator]

Good day, and welcome to Carter's Fourth Quarter 2020 Earnings Conference Call.

On the call today are Mr. 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 todays prepared remarks, we will take questions as time allows. Carter's issued its fourth 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 in this conference call and in the company's presentation materials about the company's outlooks, plan and future performances are forward-looking statements. Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation material 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 I would now like to turn the call over to Mr. Casey. Please go ahead.

[Michael Casey, Chairman & 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. It was a year ago this week that we reported our 31st consecutive year of sales growth.

In 2019, we achieved record levels of sales, earnings per share and cash flow. As you may recall 2020 got off to a good start for us with mid-single-digit growth in sales through February 2020 was forecasted to be another good year of sales and earnings growth. By mid-March a global pandemic and national emergency had been declared and the lives of people throughout the world were disrupted. In the months that followed we worked to keep our employees and our store customers safe from the virus. We reduced spending, negotiated lower product costs and improved liquidity. We significantly reduced our exposure to excess inventories caused by temporary store closures. And by curtailing inventory commitments, we were able to improved price realization and margins last year.

When the pandemic hit, we accelerated the execution of new capabilities to support the same-day pickup of eCommerce orders in our stores, curbside pickup and the direct shipment of eCommerce orders from our stores. We engaged remotely with our wholesale customers, leveraged our investments in digital product imagery and secured higher bookings for our product offerings this year. We also engaged more deeply and effectively with consumers through social media, building a virtual community of families with young children. During the pandemic, we added over 2 million new eCommerce customers and with the support of our wholesale customers, the online sales of our brands exceeded $1 billion last year. The pandemic was a challenging experience for all of us, but it also enabled us to find new ways to improve our business. We believe the foundation of our company is now stronger because of the pandemic and we are better positioned to weather future storms that may occur.

This morning, we're reporting nearly $1 billion in sales for the fourth quarter of 2020. It was the strongest quarter of the year in terms of sales and earnings contribution and the performance was in line with what we had planned. We reporting a record gross profit margin in the fourth quarter enabled by a stronger product offering, leaner inventories and more effective marketing. As planned, spending grew in the quarter, driven by investments in eCommerce, better staffing and retention in our distribution centers and the partial restoration of compensation for all of our employees. Compensation was curtailed for several months earlier in the year. With respect to sales trends, the fourth quarter got off to a strong start with October sales at 95% of prior year sales, consistent with the very strong demand we saw in September.

On a comparable basis, normalizing a holiday calendar shift and excluding the 53rd week. November and December sales were 84% of prior year sales. Our best analysis of the deceleration in demand relative to September and October reflects lower store traffic due to the resurgence of the virus heading into the final months of the year. Recall that health officials warned us all to stay home and avoid traveling over the Thanksgiving and Christmas holidays. And we're lean on inventories heading into the holidays and less promotional than last year. Sales trends improved meaningfully at the end of December and continued into January. We saw growth in January sales and are expecting first quarter sales to be comparable to last year. March is expected to be the largest month of sales and earnings contribution in the first half this year. March sales have historically been driven by Easter holiday shopping and the arrival of spring like weather in more parts of the country. We're expecting very good growth in the first half of this year as we comp up against temporary store closures last year. And for the year, we're also expecting good growth in sales and profitability despite the lingering effects of the pandemic.

Our Retail segment was the largest contributor to our fourth quarter sales and profitability. All of our U.S. stores remained open for the quarter though we did curtail hours 13% based on lower traffic. COVID continues to have a material impact on store traffic. Our border and tourist stores have been most affected by the pandemic. Our border and tourist stores represent 10% of our U.S. stores that contributed over 20% of the decline in comparable sales. This past year, we saw a fewer international guests in our stores and fewer shopping with us online. In part, we attribute the decline in online demand from international customers to a significant reduction in our promotions this past year. Those who came into our stores in the fourth quarter came to buy. Our store conversion rate grew 5% in the quarter. The average transaction value grew 9%, driven by higher units per transaction and better price realization.

We ran much leaner in store inventories in the fourth quarter, recall that we curtailed fall and winter inventory commitments when the risks of the pandemic became clear to us in March. With leaner inventories, we focused our marketing less on promotions and more on the beauty of our product offerings. In the fourth quarter 94% of our comparable stores were cash flow positive. Our mall stores saw the largest decrease in comparable sales. 90% of our stores are in open-air shopping centers and these stores outperformed the chain.

As we shared with you last year, we plan to close about 25% of our 2019 store portfolio upon lease expiration. About 60% of those closures are planned this year, 80% of the closures are planned by the end of next year. These stores collectively contributed over $140 million in sales in 2020 with an EBITDA margin of less than 3%. By comparison, the balance of our stores had an EBITDA margin of nearly 18%. Our focus is on fewer better higher margin stores located in more densely populated areas to provide a higher level of convenience to in-store and online customers. Our store closure plan is expected to be accretive to earnings in 2021 and provide a $10 million cumulative earnings benefit by 2025.

ECommerce continues to be our fastest growing and highest margin business. ECommerce penetration grew to 45% of our retail sales, up from 38% in the third quarter. Increasingly, we are seeing customers enjoy the convenience of picking up their online purchases at our stores located closer to their homes. Omni-channel sales grew to 24% of our eCommerce orders in the fourth quarter, up from 12% last year. Last year, we leveraged our stores from Maine to Hawaii to ship online purchases from over 600 stores. As a result, we improve the speed of delivering online purchases and improve the profitability of our eCommerce business. We expect the mix of omni-channel sales to grow to nearly 40% of online orders by 2025.

Our Wholesale segment was the second largest contributor to our fourth quarter sales and profitability. Collectively, we continue to see double-digit growth with our exclusive brands which were margin accretive in the quarter. ECommerce sales of our brands through our wholesale customers grew over 30% in the fourth quarter and up over 50% for the year. Sales of our flagship Carter's brand were lower in the fourth quarter, reflecting our decision to curtail fall and winter inventory commitments. Off-price sales were also lower in the quarter. The excess inventories created by temporary store closures and related cancellations due to the pandemic were largely sold through our own stores at higher margins. Going forward, we will continue to use our own stores to move through a higher percentage of excess inventories rather than selling to the off-price channel. Spring selling is off to a good start with our wholesale customers. They too are leaner on inventory, have a lower mix of prior season goods and are seeing better price realization and margins. We're projecting very good growth in wholesale this year, especially in the first half, assuming all stores remain open.

Our International segment contributed over 11% of our fourth quarter sales. Canada and Mexico contributed nearly 90% of our international sales. Our eCommerce sales in those markets grew over 60% in the fourth quarter and grew to 30% of our international retail sales from 18% last year. Both businesses performed remarkably well despite COVID-related store closures in the fourth quarter. In Canada and Mexico, many of our stores were closed in the weeks leading up to Christmas. Some of those closures continued through February. The strength in our international wholesale sales was our Simple Joys brand sold exclusively through Amazon. That business nearly doubled in the fourth quarter with Amazon's expansion of our brand into Europe and Japan. Most challenging component of our International segment is with smaller retailers, representing our brands in over 90 countries. Though individually small, collectively they contributed about 15% of our international sales in 2019 and were margin accretive. Wholesale sales to these retailers were down over 50% in the fourth quarter. Based on bookings from these wholesale customers, we're projecting a good recovery in this component of our business this year.

Our supply chains did an excellent job, supporting the continued acceleration in eCommerce demand in the fourth quarter. The speed of delivering online purchases was meaningfully better than last year and we saw a related improvement in our customer satisfaction ratings. In 2020, we invested to ensure the safety of our distribution center employees, raised their wages to improve staffing and retention, and invested in technology to improve the speed of delivery. Our supply chain team also negotiated lower product costs for 2021, which may enable us to further improve our gross profit margin this year. In the fourth quarter, we began to see delays in the receipt of products from Asia. Our suppliers were running on average 10 days late due to COVID-related challenges and precautions and transportation delays. Since the reopening of stores last summer, there's been a surge of imports into the United States. As a result, there is an unusual shortage of cargo containers in Asia, further delaying the shipment of our products to the United States. Given the imbalance in the supply and demand for cargo containers, the cost per container has risen significantly in recent months. This is a macro issue.

Our best information suggests we'll see delays and higher transportation rates for most of the first half. The surge in imports has also caused congestion at the West Coast ports in California, adding additional time to the receipt of goods. Our wholesale customers are challenged by the same delays. The late arrivals of our warm weather products and there is plenty of warm weather ahead of us. To date, we have not experienced any meaningful order cancellations, but that's a higher risk than usual given the abnormal delays in deliveries from Asia. Since our last call with you, we have revisited the longer term potential of our brands. By 2025, we expect sales to grow to nearly $3.7 billion with an expansion of our operating margin to 13%. Our growth strategies are focused on leading in eCommerce, winning in baby, aging up our brands and expanding globally. Our Carter's brands have the largest share of the eCommerce children's apparel market in the United States. In the fourth quarter, Carter's online experience was rated as one of the top user experiences among the largest U.S. and European eCommerce websites.

We also have unparalleled relationships with the leading retailers of young children's apparel, including Amazon, Target, Walmart, Kohl's and Macy's. Carter's is the number one brand in baby apparel with over 4 times this year of our nearest competitor. It's been the best-selling brand in young children's apparel for generations of consumers. It's possible that we may see fewer births near-term due to the pandemic. We've seen births decline almost every year since the Great Recession began in 2007. And since 2007, our sales and earnings have more than doubled.

With the promise of vaccines more broadly available this year, government stimulus helping families with young children, historically low interest rates, strong housing market and an improving economy, we view the risk of fewer births as a potential short-term challenge, but not a longer term obstacle to our growth. We have the number one market share in the baby and toddler apparel markets. The largest growth in our sales before the pandemic, both in percentage and absolute dollars, was driven by our product offerings focused on 10 -- 5 to 10-year-old children. With the continued success of our age-up initiative and the reopening of schools this year, we expect that our age-up strategy will be a good source of growth for us in the years ahead. We plan to extend the reach of our brands globally and profitably. International sales contributed about 12% of our consolidated sales in 2020 and are expected to grow to 15% of sales by 2025.

Over the next five years, over 60% of our international sales growth is forecasted to be driven by our multichannel operations in Canada and Mexico. Our brands are also sold through Amazon, Walmart and Costco on a global basis. We expect good growth from these multinational retailers and other retailers who are extending the reach of our brands to families with young children throughout the world.

In summary, we strengthened our business this past year and we're expecting a good multi-year recovery from the pandemic. We have built a unique multi-brand multi-channel model, which we believe is well positioned to grow and gain market share. We're committed to strengthen our business and provide good returns to our shareholders in the years ahead. I want to thank all of our employees throughout the world who are working to support their families and our company through this pandemic and for their commitment to help us achieve our growth plans.

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

[Richard Westenberger]

Thank you, Mike. Good morning, everyone.

I'll begin on Page 2 with our GAAP income statement for the fourth quarter. Net sales in the quarter were $990 million, down 10% from the prior year. This year's fiscal year included a 53rd week, so the fourth quarter consisted of 14 weeks versus 13 weeks last year. This extra week represented $32 million in additional net sales in 2020 and contributed roughly $1 million of operating income. Reported operating income was $134 million, a decrease of 18% and reported EPS for the fourth quarter was $2.26, down 20% compared to $2.82 a year ago.

On Page 3 is our GAAP income statement for the full year. Obviously, sales and earnings this past year were meaningfully affected by the global pandemic. Net sales for the year were just over $3 billion, a decline of 14%. Reported operating income was $190 million, down nearly 50% and reported EPS for the year was $2.50, down 57% from $5.85 in 2019.

Our fourth quarter and full year results for both 2020 and 2019 contained unusual items which are summarized on Page 4. We've treated these items as non-GAAP adjustments to our reported results to enable greater comparability and to provide what we believe is a clear view into the underlying performance of the business. My remarks today will speak to our results on an adjusted basis which excludes these unusual items.

On Page 5, we've summarized some highlights of the fourth quarter. It was a strong finish to what's obviously been an eventful and challenging year. We met our expectations overall for our financial performance in the quarter. We saw good continued momentum in several important parts of our business. ECommerce comparable sales were strong, up 16% in the U.S. and up 47% in Canada. Our store sales in the U.S. were stronger than we had forecasted in part due to a slight improvement in the store traffic trend in December. A real headline and driver of our fourth quarter performance was gross margin, which expanded significantly over last year; this was an acceleration over the gross margin expansion which we achieved in the third quarter.

Despite lower earnings, our cash flow was very strong in the year, reflecting our working capital initiatives implemented in response to the pandemic. And our balance sheet and liquidity both were in great shape at the end of the year.

Turning to Page 6 for a summary of net sales for the fourth quarter; reported net sales declined 10% to $990 million. On a comparable 13-week basis, net sales declined 13% year-over-year. I'll cover our business segment results in some more detail in a moment. But as we had expected, sales were lower year-over-year across the business. Sales were negatively affected certainly by the ongoing disruptions of the pandemic, but also in part due to some of our decisions earlier in 2020 to curtail our fall and inventory commitments. In recent weeks, we have also been further challenged by delays in the planned receipt of inventory. This is an industrywide issue with many companies experiencing delays in the scheduled arrival of product from Asia. We've estimated that the impact of late arriving product negatively affected sales by about $30 million in the fourth quarter.

Turning to Page 7 and our adjusted P&L for the fourth quarter; while sales were down versus last year, as I mentioned, the profitability of our sales increased significantly with our gross margin increasing by 460 basis points to 47.1%. This represented record quarterly gross margin performance. So despite sales decreasing over $100 million, gross profit dollars were roughly comparable with a year ago. This increased gross margin rate was driven by the strength of our product offering, improved price realization, which was a result of more effective marketing and promotion, and our focus on inventory management, including good progress in reducing excess inventory. Royalty income declined about $1 million versus last year, largely due to the timing of shipments of spring seasonal goods which shifted from the fourth quarter last year into first quarter 2021 and late arriving product.

Adjusted SG&A increased 5% to $327 million. We partially restored certain compensation provisions, which had been suspended earlier in the year. So the fourth quarter reflected some element of catch up for these expenses. Our employees did great work this past year managing through very difficult circumstances. As we rationalized our promotional activity in Q4, we reinvested some of those savings into marketing, specifically digital media, which delivered good returns. We also made several investments to strengthen our eCommerce and omni-channel capabilities, including the launch of a new mobile app, enhancing our websites and continued investment in improving the speed and efficiency of our distribution center which supports eCommerce. We believe these investments will strengthen our capabilities long-term and help us as the business recovers from the pandemic.

Adjusted operating income was $145 million compared to $162 million in the fourth quarter of 2019 and adjusted operating margin was 14.7%, comparable to last year. Below the line, net interest expense was $15 million, up from $9 million in the prior period due to the $500 million in new senior notes we issued in the second quarter. We had a $2 million foreign currency gain in the fourth quarter and our effective tax rate was approximately 18%, down from about 19% last year. On the bottom line, adjusted EPS was $2.46, down 12% compared to $2.81 in 2019.

Moving to Page 8 with some balance sheet and cash flow highlights. Our balance sheet and liquidity remained very strong. Total liquidity at the end of the fourth quarter was approximately $1.8 billion with $1.1 billion of cash on hand and virtually all of the borrowing capacity under our $750 million credit facility available to us. Quarter-end net inventories were up 1% to $599 million. While largely comparable to last year in total of the composition of our inventory was very different because of our decisions to proactively curtail inventory earlier in the year, our inventory levels in our stores and for the core Carter's brand at wholesale were meaningfully lower than a year ago.

Our exclusive brand inventories were generally higher at year-end. Total year-end inventories were down year-over-year when considering the inventory from summer 2020, which we pack and hold earlier in the year as the pandemic unfolded. We made good progress selling through this pack and hold inventory during the year and expect to sell the remaining balance as we move through the first half of 2021. We also made good progress reducing our overall level of excess inventory during the fourth quarter. Our Q4 accounts receivable balance declined 26% compared to the prior year, principally due to lower wholesale sales. Accounts payable increased by $290 million to $472 million, which reflects the extension of payment terms and rent deferrals. Long-term debt was nearly $1 billion, up from roughly $600 million at the end of last year. This increase reflects our successful senior notes issuance this past May and full repayment of outstanding revolver borrowings in the third quarter.

Operating cash flow in 2020 increased by about $200 million to $590 million. Our strong focus on working capital and management of spending enabled us to achieve this record performance despite lower earnings in 2020. Note that while we're planning higher earnings in 2021, operating cash flow is expected to be lower this year due to the repayment of deferred rent and adjustments to some vendor payment terms.

Moving to Page 9 with a summary of our adjusted full year performance; while 2020 sales and earnings were of course meaningfully affected by the pandemic, the combination of our strong product offering, marketing, inventory management and productivity initiatives enabled us to minimize the overall profit impact of lower sales. With demand so uncertain we made the choice early on in 2020 to focus more on profitability than on sales.

The effectiveness of our initiatives is most evident and looking at the difference in our performance between the first and second halves of the year, which we've summarized on Page 10. First half sales were significantly affected when our retail stores were closed for much of the second quarter and shipments to many of our wholesale customers were suspended, while their own stores were closed. Gross margin performance was starkly different between the first and second half. In the first half our gross margin declined by 350 basis points in part due to taking higher provisions for excess inventory.

In the second half, we achieved record gross margin as a result of improving our realized pricing and making good progress on clearing through that excess inventory. Profitability followed this gross margin performance with a much smaller decline in adjusted operating income in the second half with an expansion of our adjusted operating margin versus a decline in the first half.

Turning to Page 12 with a summary of our business segment performance in the fourth quarter. In the largest part of our business, U.S. retail, we improved profitability significantly despite the decline in total sales driven by improved product margin and good growth in our high margin eCommerce business. Profitability in U.S. wholesale and International declined with sales lower it was more difficult to leverage costs in these businesses. The increase in corporate expenses was largely due to the additional provisions for compensation and to a lesser extent some spending on external consulting in the quarter.

Now, turning to Page 13 with some detail on U.S. retail performance in the fourth quarter. Total segment sales declined 6% compared to last year. Total comparable sales declined 9%, reflecting strong eCommerce growth and lower store sales. Q4 traffic while down meaningfully versus a year ago came in ahead of our expectations and was better than the apparel industry benchmark which we follow. The adjusted operating margin of our U.S. Retail segment improved by 280 basis points to 19.1%, driven by higher product margins as a result of improved price realization, lower product costs and lower inventory provisions. These gains were partially offset by investments to strengthen our eCommerce business and the timing of compensation provisions.

Moving to Page 14 with an update on our omni-channel initiatives; our investments in recent years to build our omni-channel capabilities are clearly paying off. The ability to pair our leading eCommerce website with our nationwide network of stores is a strong competitive advantage. As shown in the chart here, we saw strong year-over-year growth in omni-channel demand in the fourth quarter. We believe these capabilities provide a better experience for our customers in terms of convenience, flexibility and shorter click to consumer times. Our store-based fulfillment options also generally provide better economics compared to traditional fulfillment from our distribution center.

Lastly, our ship-to-store and pickup in-store options have driven significant traffic to our stores accounting for 1.7 million store visits in 2020. About 25% of the time customers picking up their online orders made incremental purchases while in the store.

Moving to Page 15 to some of our recent marketing; fourth quarter marked the arrival of the first babies conceived during COVID. While 2020 certainly provided its share of stress and negative news, there is no happier occasion than the arrival of a new baby. With this spirit, we launched a new digital brand campaign called Hello Optimism and declared these new babies to be part of generation optimism. Campaign featured real families and their babies born in 2020. Campaign has generated an overwhelmingly positive response, which drove gains in brand awareness, brand favorability and future purchase intent with customers, while introducing Carter's the number one most trusted baby brand to a new audience of parents.

On Page 16 we continued to innovate in our marketing in the fourth quarter and lean into emotionally driven digital experiences for families such as our virtual visits with Santa and virtual PJ parties with Leslie Odom Jr., the star of Hamilton. These millennial parents have responded well to these digital offers. As Mike said, we added 1 million new online customers in 2020. These brand's storytelling and customer engagement efforts resulted in a record 8 billion media impressions across the year, a significant increase over 2019. Overall, Carter's continues to enjoy the highest level of engagement on social media among all the other major players in the young children's apparel market.

Turning to Page 17; we continue our efforts to expand the reach of our brands to more diverse consumers, which reflects our company's broader focus on diversity and inclusion. To celebrate the wonderful legacies of historically black colleges and universities and to inspire the next generation, we recently launched an HBCU apparel collection partnering with a series of HBCU alumni influencers. We also partnered with Sisters Uptown Bookstore in New York City on a Black History Month reading series, highlighting historical black figures and their notable contributions to our country and society.

Moving to Page 18 and with a recap of the U.S. wholesale results for the fourth quarter; net sales were $290 million compared to $349 million a year ago. Despite late arriving product, we've largely achieved our sales forecast in wholesale for the quarter. Sales of the Carter's brand and sales in the off-price channel were each down about 40%, tracking with our reduced inventory positions in these parts of the business. We are planning for good growth of sales in the core Carter's brand in 2021. With regard to the off-price channel sales, we made much greater use of our own retail stores in the past year to clear excess inventory at higher recovery rates than we've historically achieved in the off-price channel. Online demand for our brands through our wholesale customers was strong in the fourth quarter with growth of 36% over the prior year. U.S. wholesale adjusted segment income was $54 million in the fourth quarter compared to $67 million a year ago.

Adjusted segment margin declined 60 basis points, reflecting higher compensation and marketing expenses that were offset in part by lower inventory-related charges and lower bad debt expense.

On Page 19, we've included a photo from Kohl's, which is one of our largest and longest tenured wholesale customers. Our Carter's baby shops at Kohl's continue to provide a competitive advantage, which elevates the presence of our brand and the customer shopping experience. Our Little Baby Basics assortment drove strong sales increases all season as customers stocked up on these must-have basics. This product is shown here in the front isle of this Carter's shop.

On Pages 20 through 22, we've included a few slides that highlight our exclusive brands which are available at Target, Walmart and on Amazon. These brands had a terrific 2020 and that momentum continued into the fourth quarter where collectively sales of the exclusive brands increased 13% over 2019.

On Page 20, we worked with Target to create a special presentation of Valentine's Day product as one way to help consumers looking for a small way to celebrate during this time. Celebrating special holidays is an important focus of the Just One You brand with beautiful product and compelling brand presentation year round.

On Page 21, we've depicted some of the beautiful Child of Mine product carried at Walmart. We've seen a significant -- we've seen significant growth of the Child of Mine brand online with Walmart over the past year. We partnered with Walmart in the use of our photography and brand assets to ensure a compelling presentation of the Child of Mine brand on the Walmart website.

On the next page, Simple Joys on Amazon continues to be a good source of growth for us. In 2020, we expanded our product offering in key categories and added incremental categories such as outerwear, robes and sleep bags. Pictured here is our latest brand store featuring a range of products, including our 2-Way Zip Sleep & Play swimwear and play wear for newborns to toddlers.

Moving to Page 23 and our fourth quarter results for our International segment; international net sales declined 13% to $114 million. We saw significant disruption in our Canadian and Mexico stores in the fourth quarter as many stores were closed due to the pandemic in these markets. Online demand in Canada was very strong with eCommerce comps up nearly 50%. As Mike mentioned, the disruption in our international partners business continued in the fourth quarter, but we're planning for a rebound in this part of our business in 2021. International adjusted operating margin was 13.3% compared to 16.2% a year ago. This decline reflects deleverage of store expenses due to lower store sales, eCommerce investments, and the catch-up compensation provisions, offset by lower inventory costs.

On the next few pages, beginning on Page 25, we've summarized some of our thoughts on our strategic positioning in the industry and the growth we're targeting over the next few years. We believe the company has a number of strategic advantages in the marketplace. You've heard us speak about many of these over the years. Our brand portfolio contains the most established and trusted brands in which multiple generations have clothed their children. We are unique in our multi-channel business model that broadly distributes our brands, including through a growing and vibrant direct-to-consumer business. We've had a long record of strong operating performance and returns, including significant cash generation.

On Page 26, we've summarized our mission and vision. Clearly, our objective is to continue to lead the marketplace with special emphasis on the strategic pillars listed here, leading in eCommerce, continuing to win in baby, aging-up and expanding globally. We've recently refreshed our multi-year financial forecast. It is difficult to predict the future right now with a lot of precision, but we believe good growth is possible over the next several years. We believe we can generate mid-single-digit growth overall in net sales comprised of low single-digit growth in U.S. retail, mid-single-digit growth in U.S. wholesale and high single-digit growth in our International segment.

We believe profitability can grow faster than sales as we continue to pursue our transformation and productivity agenda. So our target for operating income is in the low double-digit growth range. We believe our anticipated significant cash generation provides us an opportunity to augment operating income growth through debt pay down and the resumption of share repurchases and thereby target EPS growth in the mid-teens. Our forecasts indicates we will generate substantial cash in the coming years, which provides us significant flexibility to reinvest in the business and pursue alternatives, which includes evaluating M&A opportunities where appropriate, paying down debt and returning capital to shareholders.

On Page 27, there are a number of elements which we believe will contribute to our planned growth in sales and earnings over the coming years. We've summarized some of these here for you. I won't read this list, but the good news is the number of factors listed. We have multiple meaningful ways to drive growth in our business.

Turning to Page 29 and our outlook for 2021; while there remains significant uncertainty regarding the ongoing impact of COVID-19, we believe we will have good growth in both sales and earnings in 2021. We're expecting all of our business segments will deliver growth in net sales with our consolidated net sales growing about 5%. We're planning for good growth in operating income and operating margin expansion in 2021. Adjusted EPS is expected to grow about 10%, a bit less than what we are planning for operating income growth because of the higher interest costs from the senior notes we issued last year and an assumption of a higher tax rate with more of our income expected to be generated in the United States this year versus overseas.

We expect the first half of the year will be the more meaningful period of sales and earnings growth for a number of reasons, including the comparison to the first half of last year with the initial pandemic disruptions as well as various timing differences between the years and wholesale shipments and spending. We won't match 2020's record year of cash generation as we repay deferred rent and have other changes in working capital. We'd expect 2022 to be a more normal year of significant operating and free cash flow generation. We're cautious and conservative in our planning assumptions given the continued uncertainty which exists, this posture has served us well overtime. In terms of the first quarter, we expect sales will be comparable to last year.

We do expect first quarter profitability will increase significantly with operating income in the neighborhood of $30 million and adjusted EPS of approximately $0.25 compared to losses a year ago. In terms of key risks, we continue to monitor the status of later arriving product across our various channels and the potential impact these delays may have on the sales of spring product. Also, we're seeing an ongoing escalation of transportation costs in the marketplace, which may result in additional expense above what we have planned in this year.

With these remarks we're ready to take your questions.

[Operator]

We have Ike Boruchow of Wells Fargo. Please go ahead.

[Ike Boruchow, Wells Fargo]

Hey, Mike. How are you? I guess I'll ask two, one for Mike, one for Richard. Just Mike, there been lots of media and editorial about the birth rate. I mean I totally appreciate what your comments are around you've grown your business despite a headwind on the birth rate the last several years, but it just seems like there is a much more pronounced decline in the birth rate. Can you just kind of talk about maybe how that might impact your business, not longer term, of course, but maybe over the next 12-plus months? Have you seen anything in your zero to two category the kind of related to that? And then Richard, is it possible to just dig in a little bit more on the Q1 revenue guidance. I mean, is it wholesale, is it retail, is it eCommerce normalizing? It's just -- I'm having a little trouble trying to see why your revenue wouldn't be a little bit better in the first quarter. Any help would be great.

[Michael Casey, Chairman & Chief Executive Officer]

Sure, sure. So Ike with respect to the births, we have not to date seen any meaningful change in the performance of our baby business. Keep mine, a very high percentage of our business with Walmart, Amazon and Target is focused on baby and that's been the strength of our business this past year. Online demand for our baby apparel has been terrific. That said, the intent is up on this. There is, over the years, over many years we've seen a correlation between strength to the economy and impact on birth rates and we've all known people in our -- in this past year in our family or friends have delayed marriages and when you delay marriages more often than not you're delayed delaying starting a family; so we're keeping it eye on. Best information we have is as there might be 300,000 to 500,000 fewer children born in the United States this year. It's not going to happen on January 1, but at some point during the course of this year, we may see fewer births and our best analysis would suggest typically a family will spend some portion of about $700 on a newborn child in that first year. So, $700 per child on that range of 300,000 to 500,000 fewer births, it's a potential exposure for the market of some portion of $200 million to $350 million. We own a third of the newborn market, say that zero to 10-year-old child. We own a third of that market. So, for us, it's some portion of $70 million to $100 million revenue exposure. Again if that all happened on January 1st, which it won't.

And so anyways, we're going to keep an eye on it. With every quarterly call, we'll update you on what we're seeing. But to date we haven't seen any meaningful change in the performance of our baby product because of that exposure. I actually say Little Baby Basics, which is the core of our Carter's brand. Particularly in the baby space, there is nothing more beautiful in the market that our Little Baby Basics. I would say that's probably the best performance we've had this past year and probably three or more years. So that -- so we'll let update you as we go through the year. And we are mindful that is an exposure that's been taken into consideration in the guidance that Richard's sharing with you this morning and we'll see what impact, if any, it has on us in the balance of the year. Richard?

[Richard Westenberger]

Yes. Ike I would say on first quarter revenue, I would say our ambitions had been higher until recently and it's really the effect of these product delays that have caused us to be a bit more modest. We are planning, I would say for some slight growth in wholesale and in our U.S. retail business. Stores are planned down in the U.S. and eCommerce is planned up in the first quarter. And right now we have international plan down. We still have significant store closures in Canada. We still have some stores closed in Mexico. So those are kind of the building blocks. A lot will have to do if we start to see a better trend on the arrival of product then perhaps we could have some additional shipments go particularly in wholesale. But right now, we're being conservative on that.

[Operator]

Thank you. [Operator Instructions] We will now take our next question from Paul Lejuez of Citi. Please go ahead.

[Kelly Crago, Citigroup]

Hi, guys. This is Kelly Crago on for Paul. Good morning. A question on your assumed sales transfer on your closed stores. Number one, where do you think that that -- those sales will go? Is it other Carter's stores, is it online, is it to your wholesale accounts and what have you seen in the past? And then just the second question is around the competitive landscape, how is the commercial environment looking this spring?

[Michael Casey, Chairman & Chief Executive Officer]

Yes. So a couple of things, Kelly. I think in terms of store transfer, we've experienced that transfer in the low 20s, 20% to 25% transfer. We've got good data on that. And that's transfer within our retail channel. So our stores and our online business and we've seen in both. We do a good job marketing to those customers and making sure they know the next closest store and of course driving our online business. So I'd say we plan probably 25% transfer rate on that and that's in the direct channel space. In terms of promotional environment we've been less promotional. We walked back in effective promotions. We really focused on our loyalty program and our Carter's credit card and I think the marketing team has done a really good job of increasing the brand and emotional content in all of our consumer marketing going from promotion to emotion and really focusing on emotion. So we feel good about that. I think if you look back in Q4, I would say that at least the folks that we sell to that the wholesalers were less promotional. Inventories are low in the channel. Everybody we sell to actually wants more inventory right now. So I think folks are doing a good job managing their business, getting price realization, higher margins as we've all plated tight and conservative given the uncertainties.

[Richard Westenberger]

And Kelly, one thing I would just share with you on these store closures. Nearly all of these store closures are being done upon lease exploration because we've been in these centers for 10 years. We've been following the traffic patterns. And increasingly, we're analyzing to what extent our support -- our stores support eCommerce customers. So we're looking at these omni-channel sales. What percentage of our customers are opting to pickup their online purchases the same day at a store located closer to their homes. So after 10 years in the center when the lease comes up for renewal, increasingly, we're saying listen there are better opportunities available to us in adjacent market. So substantially all of these closures are at the end of a 10-year lease, and we're just opting to exit as opposed to reinvest into a center where the co-tenancy has changed, the traffic patterns have changed and so -- and we see better opportunities to open in adjacent markets.

[Kelly Crago, Citigroup]

Got it, thanks. And just to quickly follow up on Ike's question around the sales assumptions in 1Q. I guess, how -- why would sales be flat in 1Q with March being the easiest comparison? I think you mentioned that sales were positive in January. I'm not sure what you said about February, but just is that is related to the supply chain disruptions is there any way to quantify that and how long you think that will continue? Thanks.

[Michael Casey, Chairman & Chief Executive Officer]

March is a significant month Kelly. So we typically look forward to March. It's bigger than January and February combined. I would say the product delay disruptions have been acute in wholesale. And as we get closer to the month of March, I think some issues have emerged in retail. We're just a bit more cautious about what may be on hand, particularly in the stores. We're probably in a bit better shape to do the business online at this point.

[Operator]

Thank you. We will now take our next question from Susan Anderson of B. Riley. Please go ahead.

[Susan Anderson, B. Riley]

Hi, good morning. I guess, just looking at gross margin and SG&A for first quarter, can you maybe just -- it sounds like you expect gross margin to be up. I'm curious, how much the supply chain issues is going to cause some pressure there if at all? And then also on the SG&A, are you still expecting that to be pressured in first quarter like fourth quarter? Thanks.

[Michael Casey, Chairman & Chief Executive Officer]

I'd say on SG&A, we are expecting SG&A to be up slightly. It won't be up at the same level as we saw in the fourth quarter. We are continuing to make our investments. You do have, I'd say, a more normal pattern of accruing expenses across the year, where we were suspending things last year just given as the pandemic started to become evident we started to turn things off. So, I think you'll see a more typical accrual of expenses including for things like performance-based compensation. Gross margin, we are planning for, I'd say, nice expansion gross margin in the first quarter. Recall last year in the first quarter, we took substantial charges for excess inventory and just the fact that we're not -- that we're comparing against those charges, I think will help gross margin. We're also expecting that we'll continue to make progress on pricing. We're also going to have progress, we believe, on product costs. So this should all be benefits to the gross margin.

[Susan Anderson, B. Riley]

Okay, great. That's helpful. And then, if I could just add a follow up. Just looking at the five-year top line and EBIT goals that you laid out, I think that gets you maybe just doing a quick math to a low-teens EBIT, and I think historically you had always talked about a 14%. So just curious, if anything's changed there that changes that goal longer term such as a mix shift to some of these other channels. Thanks.

[Michael Casey, Chairman & Chief Executive Officer]

Sure. The best outlook would suggest our latest models are focused on a 13% operating margin. We'll have a higher mix of eCommerce sales, which is our highest margin business. We will have a lower mix of lower margin stores and we expect to make continued progress on price realization through a stronger product offering, more effective marketing, inventory management. So we've got some good initiatives. So, yeah, this is -- we're trying to be cautious given the things we don't know this year, but the trend in our business both in sales and profitability is up.

[Operator]

Thank you. We will now take our next question of Jay Sole from UBS. Please go ahead.

[Jay Sole, UBS]

Great. Thank you so much. Maybe, Richard, just wondering if you can elaborate a little bit on the full year guidance. Just given the 1Q this year should be pretty well above point you last year and 2Q probably should be the similar story because the compares are obviously very easy. The full year guide sort of implies that the back half of the year will be significantly below 2020. Just wondering sort of what are the components, you mentioned the birth rate, Mike mentioned the birth rate, what are some other factors that are sort of implied in that back half guidance for this year?

[Richard Westenberger]

Well, I don't think we were specific on back half guidance first of all, Jay, and that was a bit intentional. We're so early in the year and there is still so much uncertainty, but I think we have to provide for some degrees of freedom here that the year may play out a bit differently than we have it planned. I think certainly the first half, as we said in the remarks this morning, is expected to be the bigger source of revenue and earnings growth. And that does track very directly to the disruption a year ago when the stores were closed. We're up against significant eCommerce comps here in the first half. I would say it was a bit later in the year though when we started to make some of the more fundamental changes to our promotional strategy. So you saw the big gross margin gains that we achieved in the second half of the year. So from a pure comparison point of view, we're certainly hoping that the stores are going to be open all year that would be a benefit.

We're hoping that wholesale rebounds certainly in first half and some of that would accrue to second half. There are a lot of timing differences, but I think we're going to have to point out as we move through the year. 2020 was an unusual year in terms of things coming and going in the P&L and I think '21 is going to be a bit of a mirror of that. So it's a tough year to plan. There are going to be differences in timing for instance of wholesale shipments. Little Baby Basics, for instance, which is a significant launch for us at wholesale, was a second half event last year and that will -- if it proceeds on its more normal timing will be more of a first half activity. So there's going to be lots of puts and takes between the periods and we'll do our best to lay that out for you. But I wouldn't say that we're necessarily pessimistic about the second half and I think we're going to have much better line of sight here as the months unfold.

[Michael Casey, Chairman & Chief Executive Officer]

Yes. Fall deliveries too were pushed to the right because stores started reopening in June and usually we're shipping fall deliveries beginning in May and fall is the biggest part of our year and some of those deliveries will begin in the first half this year versus second half last year.

[Richard Westenberger]

One thing I would add, Jay, just would be that our announced store closures do affect the second half as it relates to planned revenue. So there are 100 some stores that we're closing. Most of those store closings are weighted toward the first half. So those stores will be out of the base for second.

[Jay Sole, UBS]

Got it, understood. That's helpful. And maybe one more question from me, just on the high single-digit international growth forecast over the long-term. Within long-term guidance, you mentioned Canada, Mexico and Amazon growing internationally. Can you maybe give us some idea of what that Amazon piece might mean to that and what about China at this point? Is there any update on sort of the progress to reset that market?

[Michael Casey, Chairman & Chief Executive Officer]

Yes. So, we're expecting the Internet -- very good growth in international. I would say 60% of that growth will be driven by Canada and Mexico. Those businesses performed extremely well last year particularly in the fourth quarter despite a lot of store closures. About 30% of the growth in international come from wholesale including Amazon, the other multinational retailers and these partners. We have got bookings for the second half of this year from those smaller retailers throughout the world. It has historically been a very good margin wholesale business for us; so 30% from wholesale in the balance from Skip Hop International. The Amazon business, we're expecting very good growth. That business is off to a very good start. We've had a partner in Europe for years -- an online partner in Europe for years and I would say the growth has been OK. It hasn't been significant. In the short amount of time we've been doing business with Amazon and their launch of Simple Joys into Europe, the performance with Amazon has far surpassed than other partner that we've had for better part of the last five or more years. So, we're expecting very good growth with Amazon in international over the next five years.

[Operator]

Thank you. There are no further questions at this time. I would like to turn the conference back over to Mr. Casey for any additional or closing remarks. Thank you.

[Michael Casey, Chairman & Chief Executive Officer]

Okay. So we thank you all very much for joining this -- joining us this morning. We're going to update you again in about eight weeks. So by that time, we'll have March behind us. It's the largest month that we have in the first half of the year and we'll have a good sense for just how the year is getting under way and how we're overcoming some of these transportation delays from Asia. So, we look forward to update you again in April. Until then, goodbye, everybody. Take care, stay safe. Bye-bye.