Carter's Inc (CRI) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to Carter's first-quarter 2014 earnings conference call. On the call today are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Brian Lynch, President; and Sean McHugh, Vice President and Treasurer. After today's prepared remarks we will take questions as time allows.

Carter's issued its first-quarter 2014 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 www.Carters.com.

Before we begin let me remind you that statements made on this conference call and in the Company's presentation materials about the Company's outlook, plans and future performance are forward-looking statements. Actual results may differ materially from those projected.

For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the Company's most recent annual report filed with the Securities and Exchange Commission.

Also on this call the Company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the Company's earnings release and presentation materials. Also, today's call is being recorded. And now I would like to turn the call over to Mr. Casey.

Thanks, very much. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website I would like to share some thoughts on our business with you.

As you may have seen in the press release this morning, we weathered the winter storms in the first quarter reasonably well. We achieved our sales and earnings goals for the quarter. Thankfully, given the broad reach of our multi-channel business model, we continue to see good growth in our Carter's, OshKosh and international businesses.

And, with the benefit of more spring-like weather and Easter holiday shopping, we saw even better performance in the month of April. Given the favorable trends in our business and progress with our growth initiatives we are affirming our sales and earnings goals for the year.

Our growth in the quarter was driven by our Carter's brand with good growth in both our wholesale and retail businesses. Despite a significantly higher number of store closures due to the winter storms, retail sales grew over 10% in the first quarter. Retail sales growth was driven by new stores and the continued success of our e-commerce business.

Our new stores are performing in line with our expectations and we are on track to open 60 Carter's stores this year. Carter's comp store sales were lower than we had planned. Traffic to these stores was lower than last year which we attributed to the winter storms and the shift in the Easter holiday, but traffic was consistently better than industry trends.

Other key metrics including conversion rates and average prices all improved over last year. Carter's spring product offering was beautifully designed and executed. In retrospect, our Carter's stores may have benefited from a higher mix of wear now products given the weather. Given our experience in the first quarter we are making changes to our spring 2015 product offering to improve the seasonal transition early next year.

It continues to be a very promotional environment. Average prices in our stores were higher than last year driven by product improvements in mix but lower than we had planned to help sell through early spring deliveries. Inventories are in great shape as we move into the early summer months and we're expecting better comp store performance in the second quarter and for the year.

We believe our e-commerce business was less affected by the winter storms and we continue to see good growth in demand online for our brands. Our e-commerce sales are trending to grow about 30% this year in line with our plan. We continue to invest in e-commerce capabilities to fuel this growth engine for us. We believe our new multi-channel distribution center is on track to have fully automated fulfillment capabilities later this year.

Our new e-commerce order management system is more scalable and has improved the brand experience. Later this year we expect to complete the in sourcing of our e-commerce call center which should further improve profitability and service levels.

We also saw good demand for our Carter's brand from our wholesale customers. Similar to the experience in our stores, early spring selling was impacted by the winter storms and holiday shopping shifting into April. In April, selling has improved and replenishment trends are in line with our expectations.

We are helping our wholesale customers grow their online business with our brands by sharing our lifestyle photography, brand messaging and insights on the most productive product categories on our websites. We continue to invest in brand presentation with our wholesale customers and we're seeing a good return on those investments. Our objective is to have a consistently strong brand presence wherever consumers are shopping for young children's apparel.

With respect to OshKosh B'gosh, we are happy to report that our retail business had a very good start to the year. We believe the product offering was stronger, it had a more wear now choices that consumers were looking for, and the value message was clearer. We saw more repeat customers for OshKosh in the first quarter.

We believe consumers had a good experience with the brand last year, recognized improvements to the product offering and responded to our marketing efforts for this spring. We are also seeing a good response from consumers to our new side-by-side store model. This initiative has enabled us to improve the convenience of shopping for our Carter's and OshKosh brands.

This new model has also enabled us to leverage store expenses and improve store profitability. If you haven't seen this new side-by-side store model I encourage you to plan a visit. We opened 24 side-by-side stores last year; we plan to open another 24 this year. If we continue to see good returns from the stores we plan to increase the number of OshKosh store openings next year.

With respect to our International segment, sales were driven by our wholesale business, including a contribution from our brands now selling with Target and Walmart in Canada. Our stores in Canada were also impacted by severe winter weather, the worst we're told in many years. Similar to our experience in the United States, store sales in Canada are trending significantly better in April.

Our new stores in Canada are achieving our growth objectives and we plan to open 22 stores in Canada this year. Canada continues to be a very attractive market for us and we plan to further strengthen our presence there with the launch of a co-branded website later this year. We expect International sales to grow from 10% to 15% of our total sales by 2018. Canada and other current sources of international sales and earnings will represent a good portion of the growth we are planning.

We continue to explore new market opportunities in China, Mexico and Brazil. China now represents the largest level of international demand in our US website followed by Brazil.

With respect to first-quarter earnings, profits in the quarter were in line with our plan. As expected, earnings were impacted by higher product costs and investments in our new distribution center and information systems needed to support our growth strategies.

As we shared with you on our last call, product costs for spring were up about 7%. We absorbed about half of that increase through better pricing. We expect to show more progress in pricing in the balance of the year given the strength of our full product offerings and inventory management initiatives.

The margin decline in the quarter reflects higher depreciation charges and deleverage of retail store expenses due to the negative store comp. We're committed to manage spending this year to leverage SG&A and to improve our operating margin.

With respect to other key initiatives, we plan to improve price realization through selected price increases, better supply chain performance and inventory allocation. We're focused on improving on-time deliveries, which are meaningfully better than last year, and we expect that trend to continue.

We are ramping up our direct sourcing capabilities and expect to increase the mix from about 35% this year to 50% by 2017. We believe we're on track to complete the full automation of our multi-channel distribution center in the second half of this year and we're expecting more significant leverage of distribution costs beginning in the second half.

In summary, we made good progress in the first quarter strengthening our business and we believe we are on track to achieve our growth objectives this year. We've built a business that has weathered the economic and winter storms reasonably well. We consider ourselves fortunate to be managing a strong growing profitable business with many opportunities to improve its performance.

I'm grateful for the hard work and dedication of our employees throughout the Company. I appreciate their commitment to help us execute our growth plans. We are committed to help them build successful careers with us for many good years to come. Richard will now walk you through the presentation on our website.

Thank you, Mike. Good morning, everyone. I will walk through the presentation materials posted on our website. I will highlight our first-quarter results and then cover our expectations for the second quarter and the balance of the year.

Note that my comments refer to our performance on an as adjusted basis. Reconciliation to our GAAP results is provided in the appendix of today's presentation. I will begin on page 2 with some highlights of the first quarter.

As Mike said, we are pleased overall with the quarter. It's hard to remember a quarter with more adversity in the form of weather disruptions on such a sustained and broad geographic basis across North America than we experienced this year. Despite the severe winter weather we delivered strong top-line growth across the Company in the first quarter both in the US and in our international operations.

Sales grew 10% including a strong contribution of growth from OshKosh for the second consecutive quarter. Strong unit growth of 9% drove our top-line with a modest improvement in pricing. As expected, earnings of $0.73 per share were down versus a year ago principally due to higher product costs and higher spending. We expect the negative impact of higher product costs and the growth rate of spending to moderate over the balance of this year.

Page 3 highlights the drivers of our sales growth in the first quarter. Total Carter's sales in the US grew 10% with balanced contributions from both the wholesale and retail segments.

Carter's wholesale results were in line with our plan. There was some year-over-year benefit due to the movement of some shipments from the fourth quarter last year into the first quarter of this year contributing to the over 9% growth over last year's first quarter. This timing issue contributed about 4 percentage points of growth in the quarter.

Total OshKosh sales in the US grew by 8% in the first quarter. Our direct to consumer comp was up nearly 8% with positive comps in our retail stores and strong growth online.

First-quarter international segment sales grew 16% driven by wholesale demand in Canada and other markets outside of the US. Foreign currency translation has had a negative effect of $4 million on our reported results in the first quarter, compared to the first quarter of last year principally related to the devaluation of the Canadian dollar relative to the US dollar. On a constant currency basis adjusted international segment sales increased 23% over a year ago.

I will discuss our business segment results in more detail in a moment. Moving to page 4 and our first quarter P&L. Consolidated gross margin in the first quarter was 40%, down 110 basis points to last year, which was in line with our plan. The decline compared to last year reflects the impact of higher product costs that weren't fully offset by pricing as well as higher markdowns in Canada and negative FX movements.

First-quarter product costs increased 4% and prices improved by 1%. Adjusted SG&A was 30.8% of net sales, largely in line with our expectations. We saw good growth in royalty income of 7% driven by growth across a number of product categories including outerwear, socks, footwear and other accessories in the retail and wholesale channels here in the US. Adjusted operating income declined 8% in the first quarter and adjusted operating margin was 10.8%.

Our average share count in the first quarter was approximately 10% lower than a year ago driven by our meaningful share repurchase activity over the past year. Share repurchases net of higher interest expense associated with last year's debt offering added an estimated $0.02 to EPS in the first quarter. So moving to the bottom line, our first-quarter adjusted earnings per share were $0.73 compared to $0.79 last year.

Now turning to page 5 and a little more information on our spending and the first quarter. First-quarter adjusted SG&A increased 14% to $201 million. Our direct-to-consumer expenses, which include spending categories such as retail store four wall expenses and e-commerce fulfillment costs, increased $11 million representing the largest component of the overall increase in SG&A versus last year. This reflects retail store growth in the US and in Canada of more than 100 locations, an increase of 16% and US e-commerce net sales growth of 29%.

Depreciation increased by approximately $4 million in the first quarter. This reflects the flow-through of our growth in infrastructure investments, namely retail stores, our new Braselton distribution center, new corporate offices in Atlanta and information technology enhancements. We continue to forecast quarterly increases in depreciation of roughly this same magnitude over the balance of the year.

As we indicated on our last call, the first quarter included higher professional fees as we completed a couple of discrete consulting projects related to the supply chain and international. Technology spending was higher in the quarter as we continue to invest in upgrading systems such as our order management platforms and implementing a new product lifecycle management tool to support our planned growth.

We continue to forecast lower year-over-year growth and expenses for the next several quarters and SG&A rate leverage on a consolidated basis for the second half and full year.

Now turning to some highlights from the balance sheet and cash flow statements on page 6. Our balance sheet and liquidity remain very strong. We ended the first quarter with $277 million in cash and another $181 million of availability on our revolver.

Quarter-end inventories increased 28% versus a year ago. This increase reflects growth across the business, various supply chain strategies which have included diversifying our supply base to some longer lead time countries and the effect of higher product costs. Quarter-end inventory units increased 21% compared to last year. The quality of our inventory is high. We believe any slow-moving inventory has been well reserved for.

We are projecting second-quarter ending inventories to increase approximately 25% over last year's second quarter driven in part by planned earlier receipts. In anticipation of a potential West Coast port strike, we expect year-over-year inventory growth to moderate over the balance of the year ending the year more in line with projected sales growth.

Cash flow from operations in the first quarter was approximately $31 million compared to $53 million in last year's first quarter. The decline reflects increased inventory commitments and the timing of inventory purchases and payments as well as lower earnings. We expect operating cash flow will be strong this year in the range of $225 million to $250 million.

CapEx for the first quarter was $32 million reflecting investments in new retail stores, spending on our new multi-channel distribution center and the last significant expenditures related to the build-out of our new corporate offices.

We continue to expect full-year 2014 capital spending in the range of $100 million to $110 million. Recall that last year we improved our capital structure by issuing $400 million of 8-year senior notes at an attractive rate of 5.25%. Proceeds from this financing, along with cash on hand, supported over $450 million in share repurchases in 2013.

Our $400 million accelerated share repurchase transaction was a significant component of our buyback efforts over the past year. As we told you on our last call, we received and retired 1 million shares to close out this transaction in the first quarter of this year. Through the ASR transaction we repurchased a total of 5.6 million shares at an average price of approximately $71 per share.

We've continued open market share repurchases this year with year to date activity of approximately 114,000 shares or $8.5 million. Under our previously articulated capital allocation framework we intend to distribute at least 50% of our annual free cash flow to shareholders in the form of dividends and share repurchases.

Currently we have approximately $259 million remaining under our current Board repurchase authorizations and plan to continue share repurchases over the balance of this year. I will wrap up this section by noting we paid out $10 million in dividends in the first quarter or $0.19 per share.

On page 8 we have summarized net sales, adjusted operating income and adjusted operating margin by business segment for the first quarter. Overall our consolidated adjusted operating income was $70 million, a decrease of $6 million from last year. Our consolidated adjusted operating margin was 10.8%, down from 12.9% in last year's first quarter.

The profitability of each of our segments was affected to varying degrees by higher product costs as well as some factors unique to each individual business, which I will cover starting with Carter's wholesale on page 9.

We saw good growth across all brands within the Carter's wholesale segment in the quarter. Through the end of the first quarter season-to-date spring 2014 over the counter selling at our major national customers declined in the mid-single-digit range versus last year. Similar to what we've experienced in our own retail stores, customer sales trends appear to have improved significantly in April. Season to date spring selling is now up in the mid-single-digit range.

The decline in the operating margin of the Carter's wholesale segment was driven by higher product cost and higher inventory and bad debt related provisions. Our fall 2014 seasonal bookings outlook has improved somewhat since our last update. We now estimate fall bookings to be down in the low single digits compared to our prior view of down mid-single-digits.

For the full year we are forecasting that Carter's wholesale segment net sales will grow in the low-single-digit range. A key priority for us is to provide the best value and experience in young children's apparel. Strong brand presentation is a critical element of achieving this objective. Page 10 showcases one of the latest Carter's brand presentations at Babies "R" Us, one of our national retail partners. We plan to roll out approximately 30 of these particular shop concepts at Babies "R" us over the next month or so.

Turning to page 11 and the Carter's retail segment. Total US retail segment sales increased 11% versus last year reflecting the addition of 68 net new stores and strong growth in e-commerce sales. Our total direct-to-consumer comparable sales increased 1% in the quarter.

Carter's retail store comp sales declined about 5% in the first quarter, and, as we previously mentioned, we believe the prolonged winter and multiple storm events severely curtailed consumer traffic to our stores. We have analyzed store closure days to find this whole or partial store closing days due to inclement weather.

In the first quarter of this year we had more than 1,200 of such events in our Carter stores compared to approximately 250 last year. We also believe the later Easter holiday contributed to the lower comp sales. As Mike indicated we have seen a strong rebound in consumer demand in the month of April.

We opened 16 new stores in the first quarter and closed one. New stores continue to perform well and are in line with our expectations. For the full year we expect to open approximately 60 new Carter's stores in the US.

The e-commerce component of the Carter's retail segment grew 28% over last year with improved overall profitability. For the quarter e-commerce net sales represented 20% of total retail segment sales. Carter's retail segment profits grew 8%, segment margin declined about 30 basis points reflecting comp store expense deleverage and the impact of new store openings offset somewhat by higher e-commerce profitability.

Turning to the OshKosh retail segment on page 12. The performance of OshKosh was a real highlight in the first quarter. OshKosh retail segment sales increased 15% versus last year driven by the addition of 22 net new stores, strong e-commerce sales and higher comparable retail store sales. Our total direct-to-consumer comparable sales increased nearly 8% reflecting e-commerce sales growth of 32% and a retail store comp increase of 3%.

We believe the winter weather and later Easter affected OshKosh comps to a similar degree as we saw in Carter's. Improved average transaction value drove the retail store comp increase. Strong in-store conversion offset the decline in consumer traffic to our stores. We saw good performance across all of our store types with only the drive to outlets posting a slight decline in comps.

From a product perspective girls' playwear and accessories were the strongest drivers of the retail store comp growth. OshKosh has continued its strong performance into April with continued positive comps both at our retail stores and online. During the quarter we opened six new stores and closed one. All new stores were in the side-by-side format which feature adjacent Carter's and OshKosh stores with an interior pass through.

We saw improvement in the operating loss of OshKosh retail of the OshKosh retail segment in the first quarter and are expecting good progress and OshKosh profitability for the full year.

On the next page we have included a photo of our latest side-by-side stores. These stores opened last week located here in Atlanta. Those of you who come to see us at our headquarters can now easily visit these stores as they are only about 10 minutes away. Reaction so far from Atlanta consumers has been tremendous, particularly with regard to having an in-town OshKosh store after many years of having to travel further out to the outlets to shop this brand.

First-quarter performance for the OshKosh wholesale segment is summarized on page 14. First-quarter sales were in line with our plan with segment operating income declining about $1 million. Fall seasonal bookings in 2014 are planned down in the mid-teens range as retailers continue to be conservative in their buying commitments.

We expect full-year sales to be approximately $67 million. We continue to believe our direct to consumer businesses will be the source of the majority of the growth we are planning for OshKosh in the near term. Hopefully the expanded distribution from our retail stores and e-commerce businesses will translate to greater demand in the wholesale channel over time.

Turning to our international segment on page 15. International segment net sales increased $10 million over last year. The largest contributor to this growth was from sales to our wholesale customers outside the United States particularly to Target and Walmart in Canada.

As I indicated earlier, depreciation of the Canadian dollar, and to a lesser extent the Japanese yen, negatively affected first-quarter international segment net sales compared to last year's first quarter by approximately $4 million.

Canadian retail revenues in local currency increased 9% reflecting the addition of 16 new stores versus a year ago, offset by a 10% decline in comparable sales. Similar to our experience in the US, the severe winter weather took its toll on our retail performance in Canada. We have seen consumer traffic and comp store sales recover nicely in Canada in the month of April.

In the first quarter we opened two new stores in Canada and closed one to bring our quarter-end Canadian store count to 103. We are in the process of converting the 28 legacy Bonnie Togs store nameplates to the cobranded Carter's OshKosh B'gosh name, which we expect to complete by mid-year. We have completed the conversion of six locations so far, two last year and four so far in 2014.

The two stores converted in 2013, comped positively in the first quarter and the four stores converted in 2014 are performing above their peer group. So we're encouraged that the Canadian consumer is responding well to the new Carter's and OshKosh B'gosh nameplate.

As announced previously, we are preparing to launch e-commerce in the second half of 2014 as we continue to build out our multichannel business model in Canada.

We made good progress winding down our Japanese retail operations in the first quarter. First-quarter revenues were $4.4 million and we have now substantially exited our operations in Japan. All stores are now closed, virtually all inventory was successfully liquidated during the first quarter.

Our first-quarter adjusted results include an operating loss in Japan of $1.5 million compared to a loss of $3.5 million in last year's quarter. We expect to incur an additional $1 million to $2 million in exit costs through the third quarter of this year which we intend to exclude from our adjusted results.

First-quarter international segment adjusted operating income declined versus last year principally due to lower profitability in Canada, which is the result of the decline in comparable-store sales, and the unfavorable movement in exchange rates which has negatively affected the gross margin of this business.

Now turning to our outlook on page 16. For the second quarter we are projecting continued good top-line growth of 8% to 10% driven by our Carter's retail, international and OshKosh retail segments. We expect second-quarter adjusted earnings per share to be approximately comparable to last year's adjusted $0.46 per share. We expect second-quarter gross margin rate will be stronger than the first quarter as additional planned pricing action offsets continued higher product costs.

For the full year in 2014, as Mike said, we are reaffirming our previous guidance for net sales and earnings. We are projecting that full year net sales will grow approximately 8% to 10%. We expect full-year adjusted earnings per share growth in the range of 12% to 15% over 2013's adjusted $3.37 per share. As noted earlier, we continue to forecast good operating cash flow for the year.

There are a number of key risks that we are monitoring; these include the overall macroeconomic environment, foreign-currency movements, particularly the Canadian dollar, and the possible West Coast port strike. We've seen a heightened level of promotional activity across the marketplace beginning in the fourth quarter of last year and continuing into the first part of this year. Obviously this may have an effect on consumer reaction to our planned pricing and promotional strategies. And with those remarks we are ready to take your questions.

(Operator Instructions). Susan Anderson, FBR.

Good morning and congrats on a good quarter in a really tough environment. I was wondering if you could maybe go over the puts and takes of the guidance for the second quarter, like just expectations for gross margin and SG&A and when do we finally start to maybe see the SG&A leverage?

Sure. Well, Susan, we are expecting good top-line revenue growth, as I just went through. We are expecting the gross margin rate will be improved serially from first quarter and that is because the pricing actions start to be a bit more significant. In the second quarter we start to shift some of the fall product to our wholesale customers and that product is going out at higher prices.

So looking at essentially flattish gross margins I would say perhaps down slightly and then the growth rate in SG&A slows from its growth rate in the first quarter.

The leverage that we are expecting in SG&A is more centered around the second half of the year, that is driven by a number of things including distribution costs. We expect to have lower professional fees; marketing expenses are lower in the second half. All those contributed to the forecast that we have for leverage which occurs in the second half.

Okay, great. That is really helpful. And then just one follow-up on the store comps, second quarter-to-date. So it sounds like they have improved meaningfully with the weather pickup and obviously the Easter shift. Maybe if you could give a little bit more color in terms of just by brand are they comping positive, and then also Canada too?

I'd say they are positive in the US both in OshKosh and Carter's and they are positive in Canada. It has been a significant step up in terms of the comp number for April. We have chosen not to give you the discrete number, but it is a real departure from the first-quarter trend and we are certainly happy to see it.

Great. That sounds really good. Well, congrats again and good luck the rest of the quarter.

Robert Ohmes, Bank of America-Merrill Lynch.

This is Dan O'Hare for Robby Ohmes. What is your sourcing cost outlook for 2014 and what are some of the key drivers behind your higher product costs? Thanks.

The costs will be higher both in the first half and second half. We took more meaningful price action in the second half. So the costs have been driven up by principally higher labor costs. We have improved the product offering so some of that cost increase reflects better product benefits.

So there is nothing new to report in terms of product cost between now and the next time we update you in July we may start to have some visibility on spring 2015. I would say our merchants, our designers; our supply-chain team have been working hard to make sure that we control the growth in product costs going forward.

So we saw some portion of 6% or 7% increase in product costs, we absorbed about half of that with pricing in the first half. We plan to absorb most of that increase with pricing in the second half.

Great, and lastly, can you give any additional details for what e-commerce in Canada will look like versus e-commerce in the US?

We hope it grows to be a good business for us by 2018. We hope it grows to at least 10% of the store sales. We are projecting the store sales to be closer to $300 million by 2018, and if we are successful with that initiative the e-commerce sales should be about 10% of that or about $30 million.

Great, thanks so much, guys.

Steph Wissink, Piper Jaffray.

Two questions for us. First, gentlemen, if you could just talk about the international markets. You spent a lot of time on Canada but maybe give us some thoughts around Europe and Asia, I think you mentioned Brazil as well. Just thoughts generally around the growth of those markets in the potential long-term.

And then secondly, as you think about the Canadian business as it has bounced back a bit, are you seeing any differences between the US and Canada with respect to mix or mix shift retail to online? Thank you.

Well, we don't have -- let me start with the second question first. In Canada we don't have much of an online business. We have no real online business currently that is why we plan to launch in the second half of this year. As you know, the online experience in the United States has been terrific.

This has been a wonderful experience for us, it has been a high-growth business for us, a high-margin business for us. Time will tell whether or not we're able to replicate that success in Canada. But we will keep you informed. Today if you went on our website in Canada it is largely information only; there is no commerce sales being done on that website. But that will come before the end of the year, that is our plan.

With respect to international, I think the important thing for you to know is that most of the growth that we envision, and it starts with the growth objectives, we plan to grow the international business on average about 20% a year through 2018, that is our planning horizon in the next five years. Most of that growth will be driven by the business we currently own.

We have a wonderful business up in Canada, we do a good amount of business with multinational retailers, Costco, Walmart, Target, Sears, Babies "R" us. So we are making the most of those relationships. And we have distributors in Central and South America, we have distributors in the Middle East.

So we have got a good book of business today. And so, we are planning our international business to grow from some portion of 10% of our total sales today to about 15% by 2018. If we are successful with our growth plans we expect our total sales to be closer to $4 billion by 2018 and 15% of that would be roughly $600 million.

So we plan to hopefully double our international business during that time period. But a good portion of that growth will come from building the current business we have. New market opportunities we would say are focused on Mexico because it is closer to home, we have a good business partner down in Mexico, we are exploring the full potential of that relationship.

And based on the demand we are seeing online, particularly in China and Brazil, in the first quarter we did over $3 million online on our US website in China. That business has nearly tripled in the first quarter, second largest market is Brazil. So we have a clear indication that there is good demand for our brands outside of the United States.

The key to exploring those markets is finding a good business partner, replicating the experience we had in Canada. Our success in Canada is largely because we had a good business partner up there, we had similar values, similar perspectives on how to grow a good business, and the timing of doing anything meaningful in China and Brazil is finding a good business partner to work together.

So as those relationships are formed and we develop plans to grow those businesses we will share more. But it is important to note we have good growth ahead of us with our current business.

Thank you. Best of luck, guys.

Taposh Bari, Goldman Sachs.

I had a question just on this notion of pricing elasticity. So you are raising prices pretty aggressively in the back half. For the full year do you expect higher prices to be a net positive to revenues net of any kind of unit erosion?

And I am specifically thinking about this fall booking number, down low singles. You are raising prices pretty aggressively, I would expect -- I would've expected the fall booking number to be higher, if you could help us understand the dynamics there.

Yes, I wouldn't say we are raising prices aggressively, we have been very thoughtful on pricing action, it's based on a deep dive, a deep competitive review of where we have product that is far better than what is in the market. A lot of multi-piece sets, it is hard to see anyone else in the market with the beauty of that product offering that we offer.

So this has not been an across-the-board price increase. We learned a good experience when cotton price spiked a few years ago where there is ability to raise prices and where there is not. So things like the five pack one bodysuit, where that price point is well known by the consumer and is easily compared to the competition there has been less price action. On multi-piece sets there has been more price action.

So we have already sold in fall, so we have already had a good conversation with the largest retailers in the country. They would agree based on their bookings that we have been thoughtful on those price increases.

So, time will tell how the consumer responds to it. But this isn't the first time we have taken prices up, we have done it thoughtfully, we are mindful of the consumer is looking for good value and we're determined to be competitive in the market.

Okay. Then just a question on your distribution costs. I know you've been saying they are going to be down in the back half. Can you help us -- help provide a measure of what down means, is it going to be down slightly, down mid-single-digits, just trying to get some more context?

I would rather not be that specific right now. We are expecting leverage of distribution costs in the second half, that is one of the largest components of SG&A -- that will enable us, that is one component of several that give us the confidence that we can expand the operating margin this year.

Okay, great. And then just two quick housekeeping items. One is -- Richard, can you quantify the 53rd week in terms of revenue and EPS? And then second is, is it fair to say that April is by far the largest month of your second quarter?

No, I would say April is actually one of the smaller months; May and June are much more significant periods for us. The 53rd week we have estimated to be around $40 million in revenue, it occurs in December as we have calendarized it, it is probably a few pennies of EPS, it is not a particularly profitable week for us.

Okay. Thanks, guys. Good luck.

Rick Patel, Stephens Inc.

Congrats on the strong momentum. I know the competitive environment remains promotional out there, but can you put that into context for us whether it is better or worse than in recent quarters? And then the first quarter I know was helped by price and could you put that into context as well, whether it was taking prices up selectively on certain products like you previously mentioned or was it more expensive products that were outperforming?

Hey, Rick, it is Brian, just some commentary on that. The promotional environment continues to be robust, let's put it that way. I think it was a tough quarter in the market based on weather, so retailers did what they had to do to move goods.

We had positive AURs in the quarter. But we did promote where we needed to based on how the weather impacted our business, the spring forward product wasn't quite as strong as we hoped in January and February. But overall our inventories are in good shape. We feel good about that.

And our pricing, again, we took I would say modest pricing action in the first half; we didn't totally offset the cost as we have said before. But there was modest pricing action and we did have some elevation of AUR but it is a more purposeful approach for the second half.

Great. And then can you talk about the launch of e-com in Canada, just what does your market research tell you about how big that opportunity could eventually be? And then just given some of the pricing differences that you have across markets, does that also have the potential to be a higher margin channel?

Yes, we expect it to be a higher margin channel for us, time will tell. This is -- the analysis we have done would suggest that it could be as good as we have seen in the United States. Interestingly, on our demand in -- on our US website from Canada it does not rank in the top five.

So we are following that it might be because of the devaluation of the Canadian dollar. So part of our key initiatives is to extend the reach of the brand, make the brand more convenient. Today consumers in Canada cannot shop online and pay in Canadian dollars. So that is what we are trying to accomplish.

So we do believe our models reflect that, we believe it can grow to about 10% of the retail business by 2018. In the United States, our experience has been better than that. But we haven't even launched the website. As we start to get experience we will have a better view on what the potential is there.

Thank you. And good luck this spring.

Howard Tubin, RBC.

Hey, this is Courtney Wilson in for Howard. Can you just update us on your thoughts about the off-price channel and your use of it for clearance or as more of a distribution channel? Thanks.

Yes, Courtney, the off-price channel is a component of the Company. There is some business there that we do have I would say that they have been very helpful to us, when we have excess inventory issues, our excess has been under control, it was very modest last year actually.

So it is a channel that we do use to liquidate product. It is something that we do see us playing in going forward, but I wouldn't say it is a meaningful growth potential at all.

(Operator Instructions). Anna Andreeva, Oppenheimer.

We had two questions this morning. A question about Carter's wholesale, just very strong results there. What are you implying for this bucket in the second quarter given the timing shift? And I was hoping you could talk a bit about what is driving better expectations for fall bookings in wholesale, just any update on the negative impact from the one customer cutting back. And if you have any visibility yet on spring 2015. And just a quick follow-up on price increases.

I think in the past you had said you expect to offset all of the increases in the back half. I guess what is the rationale for what sounds like somewhat more cautious outlook now? Maybe talk about the dynamics that you are seeing of taking prices up in retail or wholesale channel? And are you expecting gross margins for the year to still be down slightly? Thanks so much.

I will take the first part of the question. I think overall for spring 2015 we feel it is too early to tell, we haven't taken the product out there in totality. But for wholesale we feel good about that long-term, it is a low-single-digit growth channel, we are planning low-single-digit for this year, there is a lot of components of moving parts.

We did talk about some customer changes the last time we spoke. I feel that situation has stabilized. But overall it is a mix of several different companies and they all have their own growth objectives. We feel that the first quarter, as Richard mentioned, about half of the upside was from some movement from Q4 into Q1.

But when you even it all out for the year we will be up low-single-digits, we believe that is the case and we believe that is the case for next year. So good channel, continued growth and we feel good about that particularly with the multi-channel distribution strategy we have and we continue to grow that wholesale business.

In terms of pricing, as Mike said, they have accepted the price increases. It candidly was not a significant conversation we booked in fall. I think they felt we did a good job and where we merchandised the lines, added value to the product and where we did take pricing action that the consumer is going to respond to it.

And then for spring 2015 we have not -- we haven't frozen that line yet in terms of seeing the samples and the cost and the pricing. So I really can't count on how that retailers will react to that at this point.

Anna, in terms of gross margin for the full year I would say our outlook is consistent with what we said before, we are expecting it to be sort of flattish to down somewhat. Certainly the effect of the product costs in the first half has a negative effect on full-year gross margin. There are some other factors to think about.

We do have this foreign-currency devaluation in Canada which is reducing or depressing the Canadian gross margin. We are incurring some additional freight expense as well as we are rerouting product in anticipation of this potential strike. Those are some additional costs that are pressuring gross margins in addition to product costs.

Thanks so much, guys, very helpful.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Casey, I will turn the conference back over to you for any closing remarks.

Okay, thanks very much. Thank you all for joining us on the call. We appreciate your questions and your interest in our business. We hope the update was helpful to you. We look forward to updating you again on our progress in July. Goodbye.

And, ladies and gentlemen, this will conclude today's conference. Thank you for your participation.