Carter's Inc (CRI) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to Carter's first-quarter 2016 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 2016 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 recent annual report filed with the Securities and Exchange Commission and the presentation materials posted on the Company's website.

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

And now I 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.

We are off to a good start this year. Earlier today, we reported a record level of sales, earnings and cash flow for our first quarter. We had good sales growth in all channels of distribution: wholesale, retail, and international. Despite the highly promotional retail market, we improved price realization and our profit margins. Our supply chain performance was exceptionally good in the first quarter in terms of on-time deliveries and distribution efficiencies, and we meaningfully increased the return of capital to our shareholders.

Given our first-quarter performance together with our latest forecasts, we believe we are on track to have another good year of growth in sales and earnings, and we are raising our earnings guidance for the year.

As we shared with you on our last call, we saw a good demand for our brands through the holidays last year, which continued into the first quarter and through most of March. Our year-to-date comp sales were up about 5% through the third week of March. With the Easter shift, we did not see the holiday-related demand we expected in the last two weeks of the quarter.

Historically, an early Easter is good for our business, if it is accompanied by warmer spring-like weather. But as many of you know, winter weather returned to many parts of the country in the latter part of March and into early April. Thankfully, with warmer weather arriving in more parts of the country, sales trends are improving and we are expecting positive retail comps for the second quarter.

The stronger dollar continues to weigh on our results. It affects us in a few ways. It increases the cost of products sold in Canada which we purchase from Asia in US dollars and then sell in Canadian dollars. It affects the translation of our Canadian results, and we believe it impacts the level of demand from international tourists shopping with us in the United States.

On a comparable sales basis, domestic demand in our retail business grew about 4% in the first quarter, but it was largely offset by a lower international demand. We saw the biggest impact from lower international traffic in the Southeast in some of our largest, most productive outlet stores in Florida. These are some of our best performing outlets that have historically benefited from significant international tourism.

Historically, we'd see good cross-border shopping for the Easter holiday, but we saw less of that this year. As we shared with you in February, we expect to see less pressure on our results in the second half when exchange rates are expected to be more comparable year-over-year.

To achieve our growth objectives this year, we have initiatives focused on providing the best value and experience in young children's apparel, extending the reach of our brands, and improving our profitability.

Within the next few weeks, we expect to execute a global refresh of one of the most important components of our Carter's product offering. We will refresh, rebrand, and launch our newborn to 24-month collections to be known as Little Baby Basics. These are the essential must-have products that our Carter's brand has long been known for and represents about 10% of our consolidated annual sales.

This is our high-margin replenishment business that has a meaningful presence in many of the major retailers in the United States, in our stores, online, and increasingly in many parts of the world, including our new e-commerce business in China. This product launch will be supported by refreshed point-of-sale marketing in thousands of store locations in the United States and international markets.

It will also be supported by increased investments in digital marketing, social media, radio and direct marketing. I would encourage you to visit our national retail partners, our stores, our websites, to see the strength of our new product offerings.

We've also strengthened our brand experience by responding to our customers' requests for extended sizes. The design of many of our sleepwear and playwear products appeals to an older child. We continue to see strong demand for our Carter's size 8, launched last fall, and we'll be introducing size 14 for our OshKosh B'gosh brand this summer in preparation for our back-to-school marketing events.

We believe we have improved the value and experience of our brands with our new loyalty program called Rewarding Moments launched last October. To date, nearly 7 million customers have enrolled in this cross-channel cross-brand rewards program. Customer engagement in this initiative has exceeded our expectations. We are seeing higher redemption rates and higher spending upon redemption. We are also seeing higher sales per customer and higher purchase frequency.

We plan to extend the reach of our brands in the United States this year by opening about 60 Carter's stores and 50 OshKosh stores, most of which will be in our side-by-side store format. The best traffic to our stores in the first quarter was to our side-by-side stores. We believe the consumers enjoy the experience and convenience of having our brands together.

We began this year with about 100 side-by-side stores, and expect to open an additional 250 cobranded stores by 2020. Under the current model on a combined basis, the side-by-side stores generate about $2 million in annual sales and a 20% four-wall margin. We expect this initiative will provide a good source of growth for us in the years to come.

We continue to strengthen the experience of shopping for our brands online. We are seeing good traffic to our websites increasingly through mobile devices. Mobile phone demand grew over 70% in the first quarter. We believe we benefit from our unique market position, having both a cobranded store and cobranded e-commerce distribution strategy for two of the best-known brands in young children's apparel.

We are reaching more consumers internationally through our multichannel, multibrand distribution capabilities. We saw strong demand in international sales which grew 14% in the first quarter.

Our business in Canada continued to strengthen its number one market share position in young children's apparel, with sales up 20% in constant currency. A recent consumer survey ranked Carter's as one of the most trusted retailers of young children's apparel in Canada.

We believe China represents a meaningful new market opportunity for us. The number of annual births in China is four times that of the United States. Our new e-commerce business in China is ramping up consistent with our plan. Since our launch last year, Carter's has ranked among the top young children's apparel brands on Tmall; that is Alibaba's consumer website. Earlier this year, Carter's was recognized by Tmall as the best new baby apparel brand on its website. And just recently, Carter's was recognized again by Tmall as The Most Fashionable Brand in the mom and baby category.

We expect this initiative will contribute over $20 million in sales this year, and we believe China may contribute over $100 million in sales to our business by 2020.

With respect to improving profitability, we are focused on increasing our direct sourcing capabilities, improving distribution center efficiencies, strengthening inventory management capabilities, and improving OshKosh profitability. We believe we are on track to source about 50% of our products directly through our Asia-based teams by 2017. We are exploring the next phase of this initiative, which may enable a higher mix of units sourced directly at better margins.

Collectively, our profit improvement initiatives should enable us to achieve a 14% operating margin by 2018.

We are encouraged by the more macro trends which are expected to be good for our business. The number of births in the United States is improving. The labor market is improving, and the trend in new home construction is also improving. Each of these macro trends should bode well for the young children's apparel market and may drive more traffic to our brands.

In summary, we are off to a good start this year. We are seeing the demand for our brands in all channels of distribution, and we have good initiatives underway to achieve our growth objectives this year. I'm thankful for all of our employees who are working around-the-clock here in North America and in Asia to strengthen our brands and our Company's performance. Their good work is reflected in the results we are reporting this morning.

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

Thank you, Mike. Good morning, everyone. My comments today will refer to our performance on an adjusted basis. Reconciliations to our GAAP results are provided in the appendix of today's presentation and in our earnings release.

I will begin on page 2 with some first-quarter highlights. Overall, we had a very good first quarter. We saw good demand across our business, with consolidated net sales growth of 6%. Adjusted operating income grew by 8% and adjusted operating margin expanded by 30 basis points to 13%, driven by stronger gross margin.

Adjusted earnings per share grew 8% over last year to $1.05, which was above our previous expectations. Some portion of this outperformance we attribute to favorable timing, including earlier-than-planned demand in our US wholesale business and lower spending. We expect to give back some portion of these benefits in the second quarter.

The net of Q1 results and our expected Q2 performance is a first-half which we believe will be largely in line with our expectations coming into the year. We believe foreign-currency issues continue to work against us, including negative translation effects which reduced our net sales growth by about 70 basis points in the first quarter, and the ongoing effect of lower international consumer demand in our US retail store and e-commerce businesses.

Moving to page 3 with details of our sales performance in the first quarter. Our Carter's and OshKosh businesses in the US each grew 5%, with good growth in our OshKosh retail segment at plus 12%. Revenues from new stores have continued to contribute strongly to our overall growth.

Our international business was particularly strong in the first quarter. Reported growth for this segment was approximately 14%, with growth of 20% on a constant currency basis. I'll cover our business segment results in more detail in a moment.

Turning to our first-quarter P&L on page 4. In addition to good topline demand, consolidated gross margin improved by 140 basis points to 42.9%. This performance reflects a modest improvement in average unit pricing, largely due to mix and lower product costs. Adjusted SG&A grew 9% in the first quarter.

Similar to recent quarters, the increase in expense was driven by growth in our retail store businesses in the US and Canada, as well as ongoing growth in e-commerce, primarily in the US but also in Canada and now in China.

We've also been investing in marketing and technology. Additional detail on SG&A in the quarter can be found in the appendix of today's presentation.

Reported royalty income was down about 5%. The decline is largely a result of the comparison to last year, which included audit recoveries from a couple of our licensees. Underlying domestic royalty income actually increased nicely in the quarter, driven by strong performance across several product categories, including shoes which has been an area of focus for us.

Below operating income, several items were somewhat unfavorable compared to last year's first quarter. The interest and other line reflects a $3 million loss in the quarter related to unfavorable settlements and revaluation of foreign-currency forward contracts.

We use these contracts in hedging a portion of the FX risk related to the purchase of US dollar-denominated inventory for the Canadian market.

Our effective tax rate increased approximately 70 basis points to 35.2% in the quarter, principally due to audit settlements that benefited the effective tax rate in the first quarter of last year.

Our weighted average share count declined approximately 2% versus last year, reflecting our share repurchase activity. So to recap, bottom line adjusted EPS for the first quarter was $1.05, representing growth of 8% over last year.

Now turning to page 5 with a few balance sheet and cash flow highlights. Our quarter-end cash position was strong at $395 million. Quarter-end inventories increased 5% versus last year, and we believe our inventory position and quality were very good exiting the first quarter.

Operating cash flow for the quarter was strong at $128 million compared to $87 million last year. First-quarter capital expenditures were $26 million compared to $21 million in last year's first quarter. Free cash flow in the first quarter improved to $103 million, driven by strong operating cash flow.

As Mike mentioned in his remarks, we were active in returning capital to shareholders in the first quarter. We repurchased $72 million of our stock in the quarter and paid out $17 million in dividends.

We've continued to execute share repurchases into the second quarter, completing an additional $54 million through yesterday as noted in today's press release. Our year-to-date share repurchases total $125 million, reflecting good progress against the new $500 million authorization approved by our Board this past February.

With respect to our capital structure, we continue to evaluate ways to possibly further optimize our balance sheet and provide capacity for the return of capital to shareholders over time. We will keep you updated on our evaluation.

Page 7 provides a summary of our business segment results in the first quarter. Consolidated adjusted operating income grew 8% over last year, with adjusted operating margin up 30 basis points to 13%. Our Carter's US wholesale and international businesses achieved higher operating margins, while Carter's and OshKosh retail segment margins declined versus last year.

Corporate expenses leveraged 40 basis points compared to last year.

Moving to our individual business segments in more detail, beginning with Carter's wholesale on page 8. Net sales for Carter's wholesale for the first quarter grew 4%, reflecting good product performance and the benefit of a new playwear initiative. As I said earlier, this growth was a bit higher than we had anticipated due to earlier-than-planned demand from several customers.

Carter's wholesale segment operating profit grew by $8 million in the first quarter. This improvement reflects strong product demand, lower product costs, favorable distribution expenses, and lower bad debt provisions.

Fall 2016 seasonal bookings are planned up modestly versus last year, and this outlook is consistent with what we shared with you on our last update. For the full year, we continue to forecast low-single-digit net sales growth in Carter's wholesale.

Turning to pages 9 and 10, as Mike mentioned, we are excited about having rebranded our core baby products as Carter's Little Baby Basics. In the next few weeks, we will begin shipping these products to our wholesale customers, as well as introducing them in our own retail stores and online.

In addition to the new Little Baby Basics name, we've reimagined the creative around these product collections to be more appealing and relevant to today's millennial moms. These couple of pages give you a glimpse at some of the new marketing collateral. You should start to see this new branding and creative across our business channels very soon.

Turning to page 11 and the Carter's retail segment. Total Carter's US retail segment sales increased 6% versus last year. Carter's retail segment same-store sales were comparable to last year, with e-commerce comp sales growing 15% and store comps declining 4%.

Our store comp decline in the first quarter reflects the continuation of a lower consumer traffic trend, which we believe was driven in part by lower demand from international consumers shopping in the US. In addition, we experienced weaker Easter holiday selling compared to last year.

To provide some perspective on the effects of the decline in international consumer demand on our Carter's retail comp metric, note that only 13% of our stores represented 100% of our comp decline for the first quarter. We have designated these 71 locations largely as tourist stores which have historically had a high mix of international consumers.

In the first quarter, we opened 16 new stores. These stores continue to deliver good returns with an average return on investment above 20%. Our Carter's quarter-end store count is higher by 61 locations versus a year ago.

Carter's retail segment profits were $41 million in the first quarter compared to $44 million in the first quarter of 2015. Segment operating margin declined by 210 basis points, driven primarily by the store's portion of the business which reflects store expense deleverage, higher promotional activity due to lower international consumer demand, and increased marketing spend.

We are forecasting that retail segment operating margins will stabilize in the second half and, in fact, increase in the fourth quarter as we anniversary the lower levels of international consumer demand we experienced last year. On a full-year basis, we are forecasting Carter's retail segment margins in 2016 to be roughly comparable to 2015.

On page 12, we've reprised some analysis that we have shared with you previously, which summarizes the significant effect we believe the stronger US dollar and lower international traffic have had on our US store and e-commerce businesses in the first quarter.

The left side of the page shows the year-over-year US dollar appreciation against a number of currencies that align with our historically significant international consumer base. Our analysis indicates that demand from international customers continues to be meaningfully lower year-over-year, down about 17% for our combined Carter's and OshKosh businesses on a comp basis. These international consumer sales declines were generally consistent with what we experienced in the fourth quarter.

Domestic consumer demand was good in the first quarter with a 4% comp increase for our combined Carter's and OshKosh businesses. We believe we will continue to experience lower traffic and demand from international consumers, at least through the first half of 2016.

Pages 13 through 15 are excerpts from a recent Carter's direct-mail piece. These three pages feature current seasonal items such as baby two-piece sets, boys' polos and shorts, and boys' and girls' swimwear.

Turning to page 16 and OshKosh retail results. OshKosh growth continues to be strong, with total retail segment net sales growth of 12%. OshKosh's retail comp increased nearly 3%, comprised of e-commerce comp growth of 20% and a store comp decline of 2%. Much like Carter's stores, the OshKosh store comp decline reflects lower consumer traffic, which we believe was heavily affected by lower demand from international consumers and weaker Easter holiday demand.

The OshKosh store comp decline was very concentrated within the portfolio. Only 5% of our stores, or nine locations, represented the entire comp decline in the first quarter. These particular stores are historically very high-volume locations with a traditionally high proportion of international consumers.

In the first quarter, we opened 11 new stores and closed one. All of the new stores were in our side-by-side format. As of quarter end, we operated 43 more OshKosh stores than at the end of the first quarter last year.

We ended the first quarter with 107 side-by-side format stores, which now represent 43% of the OshKosh store portfolio. These new stores are delivering good returns with an average ROI above 15%.

OshKosh retail segment income in the first quarter declined by $1 million to a loss of $2 million. Segment operating margin declined by 90 basis points which, similar to Carter's, was driven by the store's portion of the business and reflects store expense deleverage and higher promotional activity due to lower international demand. Benefiting this segment's profitability were distribution efficiencies and lower product costs versus a year ago.

On a full-year basis, we are forecasting OshKosh retail segment margin expansion compared to 2015, with a meaningful increase in the profit contribution from this segment of our business.

Pages 17 and 18 are selections from a recent Oshkosh direct-mail piece featuring summer product offerings. These pages feature our boys' and girls' seasonal tanks and shorts, as well as girls' skirts. All items which we think are must-have products heading into the summer.

Now turning to our international segment on page 19. We saw very strong demand for our products outside of the United States in the first quarter, as indicated by the 14% growth in net sales in this segment. Growth on a constant currency basis was even stronger at plus 20%.

Our Canadian story and e-commerce businesses have continued their very strong performance trends. Our stores in Canada delivered a comp sales increase of 13%, and e-commerce in Canada grew 47%. Combined, this represented a Canadian retail comp of 15%.

We opened two new stores in Canada in the first quarter, bringing our store total in this market to 149. As of quarter end, we are operating 22 more stores in Canada than at the end of the first quarter last year. We expect to open a total of approximately 20 stores in this market in 2016.

Our international e-commerce business nearly doubled in the first quarter, with net sales growing to $6 million compared to $3 million last year. Our new business in China drove most of this growth, with Canada contributing as well.

Net sales in the wholesale component of our international segment were $33 million, up from last year due to the addition of new international partners and growth with multinational retailers. International segment adjusted operating income in the first quarter grew by 21% to $8 million. Segment operating margin improved by 60 basis points to 10.8%, driven by the strong comp sales and margin performance in Canada that offset unfavorable foreign exchange effects.

Pages 20 and 21 include photos of one of our newest international stores. This suburban Toronto location represents our introduction to premium malls in Canada. The store opened earlier this month and is off to a good start.

Now turning to page 22 for our outlook for the second quarter and fiscal 2016. As we told you on our last call, we expect the majority of earnings growth for the year will come in the second half, with the first half weighed down by the negative effects of foreign currency, both the impact of translation of the Canadian business into US dollars and the ongoing effect of lower international consumer traffic and sales in our US store and e-commerce businesses.

We also have significant investment spending in the first half, notably in marketing, technology and supply chain, which we believe will support the longer-term growth we are planning across the business.

For the second quarter, we expect net sales to grow approximately 3% to 4%, driven by growth in our US retail and international businesses. We are forecasting second-quarter adjusted diluted earnings per share to decline approximately 10% to 15% compared to an adjusted EPS of $0.73 in the second quarter of 2015.

This earnings forecast contemplates first, that net sales in the Carter's wholesale segment are expected to decline in the low single digits, largely due to customer demand that accelerated shipments into the first quarter.

Second, we are continuing the investment spending that I mentioned. Third, we have accelerated our opening of new OshKosh stores in 2016. These stores weigh somewhat on profitability near-term as they ramp up and become more productive.

And finally, while the US dollar has weakened a bit recently, we believe the second quarter will continue to be pressured by the various foreign currency exchange effects across the business which we have described. Assuming achievement of our second-quarter plans, we'll achieve first-half earnings which would be roughly comparable to 2015, and which would be consistent with our initial plan for the year.

For full-year fiscal 2016, we continue to expect net sales to grow approximately 6% to 7%, driven by our US retail and international businesses. We are raising our 2016 full-year adjusted earnings per share guidance to reflect the benefit of our year-to-date share repurchase activity. We are now forecasting full-year adjusted earnings per share to grow in the range of 10% to 12%, up from our previous range of 8% to 10% compared to 2015's adjusted $4.61 per share.

Several risks that we continue to actively monitor include inconsistent trends in consumer demand and store traffic, the level of promotional activity in the marketplace, foreign exchange rates, and consumer sentiment in light of the political and macroeconomic environment.

With these remarks, we are ready to take your questions.

(Operator Instructions). Taposh Bari, Goldman Sachs.

Good morning. Nice start to the year, guys.

Good morning. Thanks, Taposh.

Mike, I got on the call a few minutes late. Did you talk about --?

You missed the best part.

Did you talk about April?

Yes, April is improving. We are actually seeing good performance year to date. Carter's right now total retail is up about 2%, OshKosh up a bit more than 1%. We had good performance through the year to date through the third week of March. I think our comps, our retail comps, were up about 5%.

The last two weeks of the quarter were not what we had expected. Typically, you get a nice lift during Holy Week, that week before Easter, and we didn't see it. And then typically, business drops off after Easter. And based on what I've heard from people we do business with, I think that's been a similar experience that typically, if you have an early Easter, it's good for our business if you have nice weather, if you have more spring-like weather.

But as you know, a lot of winter weather came back the tail end of March into early April. There were snowstorms up in the Northeast. It was cold here; it was cold here in Atlanta over Easter. So what we gained through most of the first quarter, we gave back in the last couple weeks.

But with warmer weather, more spring-like weather arriving in many parts of the country, the consumer is back out shopping and business is picking up. So we expect positive retail comps for the second quarter.

Good to hear. I wanted to ask another one on the store comps, which have been negative for a while now. And I know it sounds like there were discrete issues, but I was hoping you could give a little bit more color. I guess the specific question I'm asking is, you are opening a lot of stores, a lot of these side-by-side stores in, call it, domestic market or domestic addressable markets, non-tourist locations I'm assuming, and non-outlet centers.

Can you talk to what the comp growth has looked like in some of these newer stores, call it the one, two, three year old vintage stores? Are they comping positive?

They are. We are seeing good performance in the new stores. The issue we are having with the stores right now is international demand. With the stronger dollar, we are seeing less international tourism. A relatively small number of stores are representing 100% of the comp store decline, largely in these large, very successful outlet locations -- Orlando, Miami, Sawgrass Mills, to some extent out in Las Vegas. These are good, some of our largest, most successful outlet stores just seeing less international tourism.

Domestic demand, domestic demand, domestic -- the comp from domestic demand in the first quarter was up about 4%. And it largely got offset by lower international traffic. So we believe our strategy is the right one to continue to open these stores, bring the brands closer to the consumer, improve the portfolio of stores such that the outlet stores which continue to be good for us and have been very profitable stores, but make those a smaller percentage of the total portfolio.

We are seeing good returns on the new stores. We are seeing very good response to the new side-by-side stores, which the lion's share of the stores going forward will be side-by-side stores. And the best traffic that we saw in the first quarter was to the side-by-side stores.

So we feel good about the strategy. If for whatever reason in the next several years we start to see fewer good centers to go into, if we're not seeing the returns that we are seeing on the new store investments, we'll reconsider the pace of store growth. But for now, we are going to continue to open up -- probably open up about 60 Carter's stores here in the United States and about 50 OshKosh stores, and all of those OshKosh stores will be in the side-by-side format.

Great. Last one and I'll let somebody else hop on. Richard, on the capital return evaluation process, obviously you picked up the pace of buybacks here in the first quarter, but it sounds like the review is still ongoing. Did I hear that correctly? I'm just trying to understand if the increase buyback pace in 1Q satisfies the review, or if there's still a review conclusion that's pending.

Well, the review is ongoing, as I mentioned I think on our last call. This is a topic that we spend a lot of time talking about internally. We talk about it with our Board every time we get with them. So capital structure is always an important subject.

I think you have seen us be very committed to the return of capital. Hopefully, the accelerated pace that we demonstrated here in the first quarter shows that we are committed to being active against that new share repurchase authorization.

I think the outstanding question really for us is not what to do with the accumulated excess capital where we've shown a clear commitment to increasing the dividend and now doing more share repurchases. The open question really is around should there be additional leverage at work in the business, and that's the piece that we are continuing to noodle around internally and with the Board.

Our leverage ratio right now on an adjusted basis with the store leases -- we think that's the appropriate way to evaluate our commitment -- is just over 2 times. I think clearly the business can support more. The question is, should we do that and by how much.

So we are continuing to evaluate it. We have a good team of folks advising us, and we're going to spend some time with the Board on this subject as well.

Great. Thanks, guys. Best of luck.

Thanks very much.

Ike Boruchow, Wells Fargo.

Hey, everyone, good morning. Congrats on a nice quarter.

Thank you. Good morning.

Just two questions. The first part, just to go through the Q2 guide. So the sales are a little slower you talked about, due to timing of shipments at Carter's wholesale. I guess the first question is, is that a shift that fell into Q1, or is that a shift that will push into Q3? Is there anything going on there that differs from your plan from when you started the year?

Well, I'd say largely we had some volume that shifted forward into the first quarter. There is some amount that shifted later into the third quarter, but it was primarily an effect of shipments moving from Q2 as originally planned into the first quarter.

Got it, okay. And then on that sales base for Q2, the implied EBIT margin erosion I think is around 150 basis points. It just seems a little odd given the gross margin performance in Q1. So can you just talk about what exactly is driving that, whether it is elevated spending or a shift in SG&A or anything on the gross margin line? Thanks a lot.

I think, Ike, one thing to note it's the smallest quarter of the year. You can have a relatively small number of pennies have a disproportionate effect in terms of the reported percentage variances that we are talking about, so that is one thing to consider.

Certainly the revenue moving forward into the first quarter is an issue. We are planning a good gross margin performance. We are planning expansion year-over-year in our gross margin. The other variable would be spending. We do have some things that are ongoing right now in terms of the investment agenda that will weigh a bit on the quarter.

Then beyond that, just the ongoing effects of foreign currency, both translation and this dynamic of having fewer international consumers in our stores and online.

Got it, great. Thanks.

You're welcome.

Anna Andreeva, Oppenheimer.

Great, thanks so much. Good morning, guys, and thanks for taking our question.

A pleasure. Good morning.

I guess hoping to understand the expectation for earnings growth acceleration in the back half, just puts and takes there. How do we think about the gross margin for the year? I think you said up modestly in the second quarter. They were up very nicely in 1Q and inventories look very clean.

And finally, just what's driving you guys to take the earnings guide up for the year this early on? Thanks.

Sure. Well, a few things. I would say, Anna, the second half represents the largest proportion of the earnings base as well, so it's a bigger opportunity to grow our earnings just in general. We are planning for some acceleration of revenue growth in the second half; I would say a larger contribution from our retail and e-commerce businesses here in the US. We are expecting that there would be less of a drag from foreign currency, both from a translation and, hopefully, the drag in the liquidation activity that we had a year ago related to the international consumer will be lessened in the second half.

We are expecting good contributions from the other portions of our international business from Canada. As Mike mentioned, we have big plans for China e-commerce. A lot of that volume comes now in the second half. We are planning for margin expansion in the second half.

I would say SG&A right now, the way we are planning it, has a bit lower growth rate than what we are forecasting for the first half of the year. So all of that combined gives us confidence that the business will have a stronger earnings contribution profile in the second half.

As it relates to increasing the forecast, I would say our operating assumptions for the full year are largely consistent. The raise in the EPS guidance really reflects the strong year-to-date share repurchase activity that we've accomplished so far.

Thanks so much. Best of luck, guys.

Robert Ohmes, Bank of America Merrill Lynch.

Hey, good morning, guys. Nice quarter.

Good morning, Robbie. Thank you.

Hey, actually just two quick questions. Mike, every quarter you get a little further along in terms of the growth of your dot-com business versus the growth of your brick-and-mortar business.

Yes.

Is there anything you can share incrementally on -- you have the credit card data on a lot of this. Is the crossover customer increasing, decreasing; are you getting new customers on dot-com versus stores? Or maybe just remind us and some insights on what's going on there.

And then the other just quick question, I apologize if you've addressed this before, but the Cat & Jack launch coming at Target, just any color on or any expectation if that could impact your business with Target at all. Thanks.

So I'll take the first one in terms of e-commerce. Brian will address the Cat & Jack. So e-commerce business has been particularly strong, even despite the weakness in terms of international demand on the US websites, I think we've shared with you in years past.

At one point in the early days, we saw about 45% of the demand on our US website was coming from international guests, and that has dropped to closer to 25%. And even with that drop, we've seen terrific performance in terms of online demand. So I would still say the vast majority of the customers that we have shop in the stores. They like the stores; they like to visit the stores.

Our stores have been described as a candy store. You go in, there's all these rich colors, beautiful products. And increasingly as people shop online, they like the convenience of coming back into the stores. So we are seeing very good performance online that we just -- as I shared with Taposh -- in the stores is largely from international demand, and we hope that that settles down in the second half when exchange rates start to normalize year-over-year.

I would say the information we have would suggest that the lion's share of the customers that we have shop only in the stores. There's some percentage that only shop online and then there's another relatively small portion that shop both online and in stores. That's our most valuable customer, though. Those who shop both online and in the store is by far our most valuable customer.

And we continue to see good cross-brand shopping. So that's why we are continuing to roll forward with these side-by-side stores. Consumers like the physical representation of the online experience. Online you can shop Carters and OshKosh, go back and forth between the two brands, one easy convenient checkout. And they like the fact that the stores are now modeled in a similar way.

So we are expecting good growth. Online -- increasingly, Robbie, we will be combining these. Just as other retailers have done, we are combining e-commerce and the stores. As we look at the business, it's increasingly difficult to distinguish where the transaction starts.

We will have some good omnichannel initiatives rolling out in the second half where the consumers can easily shop online and pick up the product in the store. So when you put the two together, I would actually say we are delivering pretty good performance.

That sounds great.

Robbie, regarding your Target question, we have a significant business with Target. We have three exclusive brands with them -- Just One You, Precious Firsts, and our Genuine Kids OshKosh brand. The baby category has been a growth opportunity for them, but we feel our brands are well positioned there. We are the lead alternative to private-label at Target. Understand from a Cat & Jack standpoint, we do speak with them often. They are launching that brand. They are very successful with launching the brand, so we expect them to be successful with that and we wish them well.

That brand is basically replacing, as we understand it, two existing private-label brands on their selling floor. So I think they'll do a good job with that, but we have a strong partnership with them.

We'll continue to do a good job for them. We continue to invest in brand presentation with our three exclusive brands, and I think we will continue to have a significant presence there. So we wish them well.

Great, thanks very much.

Susan Anderson, FBR Capital Markets.

Good morning, congrats on a good quarter.

Thank you.

I was wondering if you can talk about the investments that you are making this year. It seemed like SG&A, at least to me, was a little bit more than expected in first quarter. And it sounds like you are making a lot of omnichannel investments. But if you could give a quick rundown on where those investments are going this year.

Sure, sure. So I'd say it's across the categories, Susan, that you mentioned. First and foremost, I'd say technology. So there is a whole range of initiatives around omnichannel that we are pursuing as the stores in e-commerce channels are converging more and more, there are capabilities that consumers expect and so we are bringing those to bear. Mike mentioned one of them. That's something that we are rolling out.

We are also in the process of addressing some of our long-standing enterprise systems that, quite honestly, are very dated and need to be replaced. We are in the process of upgrading our core financial systems. Those will go live middle part of this year, but there's a fair amount of spending and effort that's going into that initiative.

Marketing would be another area where we have decided just to spend more here in the US market primarily. Our studies show that we've underindexed a bit some of the benchmarks that are out there. We think this is an important way of continuing to drive traffic, particularly to the stores. So I think those are primarily where the investments are coming from.

Great, that's helpful. And then I think you called out an addition to just the pull-forward on the wholesale side for Carter's demand. Did you mean by that that it had slowed into the second quarter at wholesale? And if so, is that across all the channels?

No, the comment was that we had some shipments that were originally planned to occur in the second quarter that pulled forward into the first quarter. Beyond that, we did have somewhat of a timing benefit related to SG&A where just some things moved to the right, and that spending is expected to happen in the second quarter and beyond.

Got it. Okay, that's helpful. And then one last question on China and Brazil. Do you think it hurts at all the online sales in the US coming from those countries now that you guys have operations there, or how should we think about that?

For sure it does. It's easier -- the brand is more accessible. It's more convenient to shop in China now that we have the Tmall website. From what we understand, we would have seen that drop in the United States anyways. Given the issues that are going on in China, we would've seen that drop on our US website.

The important thing to know is when we combine the performance we are seeing in China on Tmall, together with the business that we still see on our US website, we are forecasting the sales to China online will be up over 50% this year. So that initiative is progressing very, very nicely. That should be a nice source of growth for us in the years to come.

Great, sounds very good. Well, good luck next quarter.

Thanks very much.

Steve Marotta, CL King and Associates.

Good morning, everybody. Mike, you mentioned earlier in the call that there are additional direct-sourcing initiatives that might get you over the 50% barrier. Can you talk about -- would that be accelerated from 2017, or does that mean beyond 2017? And also, can you be a little bit more specific about those categories?

Sure. I would say it's beyond 2017, and our focus right now is to complete phase one of the initiative that we launched about 4 or 5 years ago to go from what was at the time 100% agent-based sourcing, largely through Li & Fung. They have been great partners, they continue to be great partners. They will continue to be an important part of our sourcing capabilities.

As we approach the goal of being 50% direct sourced by 2017, we've been asking ourselves where do we go from here; what else is possible. We've built a first-class team in Hong Kong. We've got some portion of about 150 or more people helping support the direct sourcing operations for us. We think they are capable of doing more, so we are revisiting what's possible beyond 2017.

But my guess is over the next year or so, we will be articulating a strategy that takes our direct sourcing capabilities beyond that 50% goal.

Great, thank you. Rich, just to underpin your comment, share count that is expected in the fiscal year 2016 EPS guidance is exactly what, and does it assume further share repurchases from this point forward?

Well, the guidance, Steve, reflects the accumulative year-to-date repurchases that I mentioned and that are reflected in the press release this morning. The guidance doesn't explicitly have any additional share repurchase in it. That's certainly a possibility but as you know, there's a number of variables that go into forward-looking share repurchase. It becomes very difficult to base your guidance on that.

So if we do some additional share repurchase, theoretically there's some upside that might be possible for EPS, but there's a lot of variables that could go into that.

Great, that's helpful. Thank you very much.

Thank you, Steve.

Steph Wissink, Piper Jaffray.

Thanks, good morning, everyone. Just a few really quick ones for us. The first, Mike, if you could talk a little bit about the e-comm profitability threshold. Where are you at relative to that curve?

And then second, just an update on the loyalty program adoption. I know you rolled out your new loyalty program; seems like getting some good traction at the store level. I'm just curious about some of the utilization and number of members there.

And then last just on increased marketing spend, if you can give us any insights into the mix between traditional formats and maybe some of the new digital initiatives that you have.

Sure. We couldn't be more happy -- pleased with the profitability of e-commerce. I would say it is comparable year over year, but the margins, the operating margins on e-commerce are rich. And so they are well into the mid-20% operating margin range, at least in the first quarter.

In terms of loyalty, we have made good progress. We are seeing a good response to it. At last check, we have some portion, about 7 million people enrolled. We are seeing good redemption, good spending upon redemption, higher sales per customer.

So all the metrics would suggest that has been a very effective way of driving more people to our brands, both online and in the stores.

And then with respect to marketing, we are stepping up the marketing, particularly with the launch of this new Little Baby Basics. And probably more than half of that marketing will be in digital. We will continue to do some good things in terms of direct marketing. It's been very highly effective, the beautiful things that you get in your home.

The emails have been effective, but increasingly we have wonderful ways to connect with the consumer through digital marketing. So keep an eye out for the new launch of Little Baby Basics. We'll be making some noise with that starting middle to end of May.

Thanks, you guys. The imagery does look beautiful and that's a tongue twister name. Thank you.

Thanks very much.

Kate McShane, Citi Research.

Hi. Thank you for taking my question. Just in the prepared comments, you had mentioned promotional activity a few times. I just wondered if anything's changed or if this is a continuation of what you've been seeing the last several quarters, and what you anticipate for the rest of the year.

Kate, I would say overall the Q1 retail environment, it remained really promotional. Most retailers are pulsing different messages to drive traffic as that has been uneven. And I think there was some activity in the market too, to respond to the fact that Q4 was soft for a lot of national retailers, so they had to promote more heavily to clear out some of those carryover goods.

We saw it category based and total store and total site based. I know there's at least some folks, at least one customer, that's actually promoting more aggressively online even than in store, which we found interesting. So we were a bit more promotional than last year, but despite that environment we still were able to grow our AUR, which we felt good about.

Okay, great, that's helpful. Then my second question was just on the refresh. I just wondered if you were getting any incremental space in your wholesale accounts because of it, and will we see refresh of other categories either in the Carter's or OshKosh brand over the next year?

I would say a couple. First of all, we are really excited for the customers to see this -- we'll call it the new arrival -- with Little Baby Basics where we've innovated it, and we feel that continued innovation of that product as well as others is critical to remain and grow our market leadership.

So I think you'll continue to see us innovate and brand things where it makes sense. It is our core product, this one, largest category in the Company. And it's really -- it's going to be a beautiful launch with emotional marketing and imagery that's relevant to the new moms.

To tell you just a little bit about it, there's going to be a celebration of some of our heroic products like the original bodysuit, our sets business and then what we call little extras, which are completing the look. So we are very excited about it.

The national retailers have seen it. They are excited about the May launch, and it should be a good opportunity for us and for them. With that said, it is a replenishment business, so we have a significant launch.

We go out and we set the fixtures. There's multiple fixtures in virtually every account that we are in, as well as in our stores and online, and we set the product and then the product gets replenished as the customers buy it and the demand flows. So we'll see what that sell-through is, but we are excited about the results.

Thank you.

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.

Thanks very much. Thank you all for joining us this morning. We appreciate your interest in our business, and we look forward to updating you again with our progress in July. Thanks very much. Goodbye.

And again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.