Carter's Inc (CRI) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the Carter's First Quarter 2017 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. (Operator Instructions) Carter's issued its first quarter 2017 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 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'd like to share some thoughts on our business with you. We exceeded the sales and earnings goals we shared with you on our last call. We believe that the delay in tax refunds to families with young children and the late Easter holiday impacted our first quarter growth. In the weeks leading up to Easter, we saw a significant increase in demand for our brands and are encouraged by the current trends in our business. Traffic to our brands is up, eCommerce demand is strong and our co-branded stores continue to be our best performing stores. And with warmer weather arriving in more parts of the country, spring selling is meaningfully better in all channels of distribution.

Our new Skip Hop brand exceeded, its first quarter goals, the integration is fully underway and going well. We're also announcing today the launch of our new brand, Simple Joys, a Carter's brand designed exclusively for Amazon. With this launch, we now have 4 of our brands selling on Amazon. With the contribution of Skip Hop and Simple Joys, together with our other growth initiatives, we believe we're on track to have another good year of sales and earnings growth.

With respect to business trends, on our earnings call in February, we briefed you on the sluggish start to our year. The best information we had at the time suggested that the delay in tax refunds and the timing of Easter were weighing on our performance. As we shared with you, March represents the largest month in terms of sales and earnings contribution in the first half of the year. Thankfully, given the strength of our product offering and brand marketing, we exceeded our sales and earnings goals in March.

In April, we saw a significant ramp-up in sales in the weeks leading up to Easter. Easter is the most important holiday shopping period in the first half. Interestingly, nearly 80% of our retail sales during our Easter promotions were done in our stores, a slightly higher percentage than last year. With the benefit of strong Easter holiday sales, comparable retail sales have improved from down 3.5% in the first quarter to up nearly 2% year-to-date. We're expecting good positive retail comps for the second quarter and the year. We expect the largest source of our company's growth over the next 5 years will come from our eCommerce business. According to third-party research, our eCommerce business was the second largest contributor to the growth in online sales of young children's apparel in the United States last year, second only to Amazon.

In recent weeks, there have been several reports of retailers closing stores. We're often asked, why open stores, when others are closing stores? We continue to believe that our stores are an important part of our brand experience for families with young children. Our latest consumer data suggests that in the past 12 months, 86% of our active customers shopped in our stores. And our multichannel customer, those who shop in our stores and online, is the fastest-growing segment of our customer base with annual spending significantly higher than the single channel customer. A very high percentage of our stores are contributing to both sales and profitability. Given our rich margin structure, substantially all of our stores are cash flow positive. We have a discipline of closing about a dozen stores a year, we don't currently expect that run rate to change meaningfully in the next 3 to 5 years. We have the flexibility to close more stores if needed. The average effective term of our leases is less than 3.5 years.

Going forward, if we see fewer good real estate opportunities or less attractive returns on new store openings, we'll slow the pace of store openings and pursue other opportunities to achieve our growth objectives. Given the availability of good real estate opportunities and the success of our co-branded store model, we plan to open 240 more stores by 2021, which we expect will contribute about $250 million to our growth plan. In addition to the growth, we're expecting in our retail business, our new Skip Hop brand is expected to provide the next largest source of growth for us. We are forecasting about $90 million of sales from Skip Hop this year, and plan to double its sales and earnings by 2021. The integration of Skip Hop is going well. We're impressed with the quality of their team and plan to launch their product offerings on our website and in our stores in the second half of this year.

Our new business with Amazon is ramping up nicely. We tested some unique product combinations in the fourth quarter last year with success. Starting this spring, we have expanded the scope of our product offerings for them. Over the past year, we've been working with the Amazon to launch our Simple Joys brand, a Carter's brand, developed exclusively for Amazon. We've modeled this new business, after the successful launches of our exclusive brands developed for Target and Walmart years ago. Today Target and Walmart are 2 of our largest customers. With this launch, we believe Carter's has strengthened its position as the largest supplier of young children's apparel to the largest retailers in the country, reaching even more consumers with our beautiful brands.

Our new growth initiative in China is also ramping up nicely. As you know, we launched our Carter's brand on Alibaba's Tmall website in 2015. Tmall is the largest, most successful eCommerce business in China. Carter's was recently honored by Alibaba and recognized as one of the most popular young children's apparel brands on Tmall. This is a very special recognition of the good work done by many people throughout our company, following our first full year with this new initiative.

Last year, we announced a new strategic relationship with Pou Sheng, a $2 billion retailer with great brands including Nike, Skechers and Levis. Pou Sheng currently manages over 8,000 store locations in China.

Last month, we met with Pou Sheng's new CEO who shares our enthusiasm for opening Carter's stores in China. I've seen the stores they've opened in Beijing and they're beautifully executed. To date, 14 stores have been opened with a plan of 50 or more stores opened by the end of this year. If these stores continue to meet our shared expectations, Pou Sheng plans to open 200 or more stores by 2021. We expect our business in China and Canada to drive some portion of $200 million in sales growth over the next 5 years.

Our supply chain continues to support our growth objectives with excellent on-time deliveries and lower product costs. Over 50% of our products will be sourced directly from our suppliers this year. We are building our capabilities in Asia to enable 70% of our products to be sourced directly by 2021. We believe this initiative has created a more competitive sourcing model for us and will help us achieve our long-term margin objectives.

In summary, we're pleased with our progress so far this year, we have multiple opportunities to strengthen our business and gain market share. We're fortunate to own 2 of the best-known brands in young children's apparel and excited to have added 2 new brands, Skip Hop and Simple Joys, to our business. I'm grateful for the personal commitment from our over 20,000 employees throughout the world, who are working hard around the clock to provide families with young children a great experience with our brands. With their support, we expect 2017 will be another good year of growth for us.

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

Thank you, Mike. Good morning, everyone. I'll begin my comments on Page 2 of today's presentation materials with some highlights of our first quarter. We exceeded our prior sales and earnings guidance largely due to better-than-forecasted eCommerce performance in both the U.S. and Canada, some earlier than planned demand in U.S. wholesale and lower than planned spending. Consolidated net sales grew 1% over last year, driven by strong growth in our eCommerce businesses and the contribution from Skip Hop, which we acquired this past February. We had planned earnings down in the first quarter due to lower spring seasonal bookings in our U.S. and international wholesale businesses, because of the Easter holiday shift from March to April and increased investment spending.

Q1 adjusted EPS came in at $0.97 per share, a decline of 8%, but above our prior guidance of $0.80 $0.85 per share. We've estimated that a good portion of the first quarter outperformance relative to our forecast, represents favorable timing of wholesale shipments and spending favorability, which we expect will largely reverse as we move through the balance of the year.

On Page 3, we've summarized our year-over-year sales performance in the first quarter. As we told you on our last call, we have implemented some changes in our business segment reporting beginning in the first quarter of 2017 to better align our financial reporting with how we manage and evaluate our business. With these changes, Carter's and OshKosh domestic retail results have been combined into a single U.S. Retail segment.

Similarly, Carter's and OshKosh domestic wholesale operations have been combined into a single U.S. wholesale segment. Our international segment is unchanged. Skip Hop's results have been incorporated into the appropriate segments, which in the first quarter largely represented contributions to U.S. wholesale and international. So with all of that in mind, our U.S. Retail segment grew 3% in the first quarter, driven by particularly good performance in our eCommerce business. Sales in the stores component of U.S. retail declined year-over-year, which we believe reflected a more significant shift than we had planned of Easter demand into the second quarter and delayed tax refunds.

Sales in our U.S. wholesale business were roughly comparable to last year. We had planned for core Carter's and OshKosh wholesale sales to be down year-over-year. The actual decline in sales was less than we anticipated, as several retailers accelerated their demand for spring products.

Skip Hop sales were also additive to the wholesale segment in Q1. International segment sales declined 2%, with good growth in our eCommerce businesses in Canada and China that was offset by expected declines in shipments to our wholesale partners. We believe the businesses of many of our international partners have been under pressure as a result of the stronger U.S. dollar and generally weak economies in their local markets. I'll cover our business segment results in more detail in a moment.

Turning to our first quarter P&L on Page 4. Consolidated gross margin expanded by 20 basis points to 43.1%. This improvement reflects a mix shift to our higher-margin retail business and lower product costs versus a year ago. Adjusted SG&A grew 8% in the first quarter, I'll provide more color on SG&A in a moment. Interest and other expense declined 31% as last year in the first quarter, we recorded a $3 million loss related to unfavorable settlements and revaluation of foreign currency forward contracts. Our weighted average share count declined approximately 5% compared to last year, driven by our share repurchase activity. So, again, on the bottom line, first quarter adjusted EPS was $0.97 compared $1.05 last year.

Moving to Page 5 and SG&A. Consolidated adjusted SG&A grew 8% [principally] due to investments in our U.S. and Canadian retail businesses, which include new stores, significant growth in eCommerce volume and technology improvements, to improve our capabilities in areas such as workforce management, assortment planning and buying, inventory allocation and price optimization. We've also made good progress over the past couple of years in building our omni-channel capabilities. The Skip Hop acquisition and incremental marketing investments also contributed to SG&A growth in the quarter. SG&A in the first quarter came in somewhat better than we had forecasted, a portion of which was timing related and is expected to be incurred in the second quarter and later in 2017.

Page 6 summarizes our balance sheet position at quarter end and some highlights of our cash flow performance. Quarter end inventory levels were up 15% versus last year, Skip Hop contributed approximately 7 percentage points to this year-over-year growth. The balance of the increase reflects growth in the business, including the launch of the Simple Joys brand and in part, the effect of sales shifting into April, due to the later Easter holiday. As we exited the first quarter, we believe our inventories were in good shape and well aligned with our forward sales forecasts.

In the first quarter, we used our strong balance sheet and liquidity to support the Skip Hop acquisition and also return a significant amount of cash to our shareholders. Skip Hop was purchased for approximately $140 million in cash, we also returned a total of $65 million to shareholders, comprised of $18 million in dividends and $47 million in share repurchases. We currently have just over $200 million remaining on our share repurchase authorizations.

Now turning to Page 8 with a summary of our business segment performance in the first quarter. Our consolidated adjusted operating margin declined by 210 basis points, the largest contribution to this decline was lower operating margins in our U.S. retail business, followed by lower margins in the international segment. Operating margins in wholesale were strong in the quarter increasing 40 basis points versus last year. We are forecasting that operating margins at the U.S. retail and consolidated levels will be meaningfully better in the higher volume, second half than what we posted in the first quarter.

Moving to our individual business segment results beginning with U.S. wholesale on Page 9. First quarter net sales in our U.S. wholesale business were roughly comparable to last year as the contribution from Skip Hop offset declines in sales of Carter's and OshKosh spring products. As mentioned earlier, first quarter sales in U.S. wholesale were above what we had forecasted back in February, in part, due to earlier than planned demand for spring products. U.S. wholesale segment operating profit was $70 million compared to $68 million last year. Segment margin improved by 40 basis points to 23.8%, reflecting lower product costs and expense leverage compared to last year.

Our outlook for Fall 2017 seasonal bookings remains consistent, with seasonal product demand expected to decline in the mid-single digit range. While seasonal bookings are expected to be down, we expect wholesale revenues this year will benefit from the annual launch of Little Baby Basics in May, replenishment product sales and the launch of new businesses such as Simple Joys with Amazon. For the full year, we're projecting 2017 net sales in our U.S. wholesale business, inclusive of Skip Hop to be up in the low single digit range.

Continuing with our U.S. wholesale segment on Pages 10 and 11, we've included some additional information on our business with Amazon. As Mike mentioned in the first quarter, we expanded our relationship with Amazon by launching the Simple Joys brand, which is exclusive to Amazon and its prime members. As you can see we've brought some great branding and creative to the Simple Joys launch. From a product perspective the Simple Joys assortment is focused on unique product configurations and larger multi-packs of everyday essentials, which are intended to deliver differentiated and strong value to Amazon consumers.

Moving to Page 12 and our U.S. retail segment. Total U.S. retail segment sales in the first quarter increased 3% versus last year. Our total U.S. retail comp declined 3.5%. This reflected a store comp that was down about 10% and a strong eCommerce comp of plus 20%. We saw a significant shift in Easter demand from March into April, which meaningfully impacted our store comp performance in the first quarter. In addition, we believe the later Easter holiday also shifted spring breaks around the country to later in the year. These spring breaks have historically been important spring shopping periods for us.

As we noted previously, we also believe delays in income tax refunds resulted in lost sales and further pressured store comps in the first quarter. Demand trends have improved significantly so far in the second quarter. Our April year-to-date total retail comp is up nearly 2%. Regarding sales to international consumers in the first quarter, we have seen improvement in demand from international customers, shopping in our U.S. stores and website, which we believe was driven by the greater stability in currency rates. Demand was stronger online than in our stores. In general, we saw better performance in our Florida and U.S./Canada border area stores, with less consistency in our U.S./Mexico border area stores.

Segment operating income in the first quarter was $30 million compared to $39 million last year. Segment margin declined principally due to store expense deleverage on the lower comps and investments in new stores. The operating margin in the eCommerce component of our U.S. retail business improved over last year. For full year 2017, we are forecasting the operating margin of the U.S. retail segment to be roughly comparable to 2016.

On Page 13, we've provided an excerpt of some upcoming digital marketing, showcasing the relaunch of our Little Baby Basics collections, the essential must-have Carter's products that consumers know and trust. Our marketing investments are increasingly focused on digital media, which today represents a majority of our overall working marketing spend. And to date we've seen good returns from these efforts. We believe these programs are driving traffic and sales both online and to our stores.

Page 14 features one of our newest co-branded stores in the Buffalo, New York area, by bringing our Carter's and OshKosh brands together in a single store, we believe this smaller, more productive model, provides a better experience for our customers and stronger financial returns compared to our previous store formats. We ended the first quarter with 35 co-branded stores in the U.S. and expect to have about 70 of these stores by the end of 2017.

Turning now to Page 15 and the international segment results for the first quarter. International net sales in the first quarter declined 2% on a reported basis and were down 4% on a constant currency basis. Lower demand from wholesale partners outside of Canada and China and lower retail store comps in Canada drove this decline. Regarding the lower demand from our international wholesale partners, we believe the relatively strong U.S. dollar and economic weakness in various markets where our partners operate, have depressed demand in this part of our international business. We are forecasting that sales to our international wholesale partners, will be down through the balance of 2017.

In Canada, total retail store sales were comparable to last year, as the benefit of new store openings offset a store comp decline of 11.7%. Similar to our first quarter experience, in the U.S, we believe store comps in Canada were meaningfully impacted by the shift in Easter demand from March into April, in addition to more disruptive winter weather across much of Canada in the first quarter of this year compared to last year. Internationally, eCommerce performed well in the first quarter growing nearly 30%. Canada drove most of this growth comping up around 40%. China posted solid eCommerce growth as well. International segment operating income and margin both declined in the first quarter, reflecting higher China related costs and store expense deleverage in Canada.

Page 16 features a new Carter's store opened by our wholesale partner in China. This store in the city of [Chongqing] opened in March and is off to a good start. We expect our partner will have approximately 50 stores open in China by the end of this year.

Moving to Page 17 with a brief update on Skip Hop. As you know, we acquired Skip Hop towards the end of February of this year. Our integration efforts are well underway and we're pleased with our progress. The near-term areas of focus include adding Skip Hop to carters.com and to our stores. We expect good progress in developing both of these new channels of distribution for Skip Hop by the end of this year.

Moving to Page 18 for our outlook on the second quarter and the year. For the second quarter, we're expecting net sales to grow approximately 6% to 8% compared to last year. We're expecting revenue growth in all segments, inclusive of the contributions from Skip Hop, with our U.S. retail business driving most of our planned growth. Adjusted EPS for the second quarter is forecasted to be in the range of $0.65 to $0.70 per share, compared to $0.72 in the second quarter last year. This projection reflects increased spending to support our long-term sales growth, namely investments in new stores, upgrading our eCommerce experience capabilities, other retail technology and marketing. For the full year, we continue to expect good growth in sales and earnings and are reaffirming our prior guidance. Net sales are expected to grow 4% to 6%, driven by our U.S. retail businesses and the contribution from Skip Hop. Adjusted EPS is forecasted to increase approximately 8% to 10%, compared to $5.14 in fiscal 2016.

We expect the second half to drive the majority of our earnings growth for the year. Compared to the first half of 2017, we expect second half earnings to reflect higher sales growth in all segments, a more significant benefit from Skip Hop and our outlook for more significant year-over-year gross margin expansion than planned for the first half of the year. We expect to open approximately 60 new retail store locations in the U.S. and approximately 15 new stores in Canada. We anticipate another solid year of operating cash flow in the range of $325 million to $350 million and CapEx of approximately $90 million. With these remarks, we're now ready to take your questions.

(Operator Instructions) And for our first question, we go to Kate McShane with Citi.

This is Ryan Wallace on for Kate. We just had a couple of questions on SG&A. Just first, could you just prioritize the different buckets SG&A spending related to your growth investments? And then at this point in time, when do you think you might start to lap some of that elevated SG&A expense?

Well, I would say, Ryan, that the most significant area of spend is around the growth of our retail businesses in general. So we have strong eCommerce growth that drives all the operational cost that come with a very solidly growing top line eCommerce business. The next biggest bucket would be the expenses related to new stores. As Mike mentioned in his remarks that it is our intention to continue to open stores. So the ongoing kind of rate deterioration, if you want to call it that, it's really driven by just the makeshift of the business towards the higher SG&A format businesses -- those businesses also carry the higher gross margin and we think, ultimately, higher operating margin. Beyond the store expenses, we have been investing in technology. We are on probably the second full year now of a fairly wholesome agenda around building our omni-channel capabilities, as well as another -- several other investments around, I think on the core process of managing stores as well. So we're making some investments around the assortment planning, price optimization, workforce management, to make sure that the labor investment that we have in our stores is optimized. So, I would say towards the end of this year, perhaps, we're past some of that spending. But I think the ongoing trend to our prior SG&A is being driven by the makeshift in our business, will continue.

Okay, got it. And then on the Simple Joys launch, could you give any more detail around sort of what differentiates Simple Joys from the core Carter's and OshKosh product? And then how much of a contribution you would expect Simple Joys to make to the -- that wholesale low single-digit growth target for this year?

Yes two things. First of all, I don't know, if we're prepared to parse out(inaudible) the differentiation of revenue. So we'll see how it goes, we're excited about that launch. As far as differentiation, Simple Joys, as Mike said it's a Carter's brand. We designed it with a fresh, modern perspective. I'd say it's the first brand we've done that's 100% focused on the digital experience for digital savvy millennial and a more affluent prime customer. It is everyday value price and it's multipiece, It's multipiece bundles and the prime members, obviously, have free shipping as a benefit. So it is purposefully built for multiple units. So we've got everything from three piece bundles, all the way (inaudible) up to eight piece bundles. So it has higher AURs, but we're excited about it. We worked hard with Amazon by testing Carter's bundles in the last quarter of last year, we learned it quite a bit. And we've been selling it for about three weeks, the marketing is yet to hit, but we're off to a good start, we're excited about the potential.

And for our next question we go to Susan Anderson with FBR company.

I was wondering if you could talk about gross margin a little bit in second quarter as we kind of go throughout the year. Maybe just a little bit more color on how that kind of, I think, originally as I thought it's going to improve, as we go throughout the year. Is that still the same thoughts versus first quarter?

Yes Susan, that's the intention. So gross margin up around 20 basis points, really a few drivers of that in the quarter. We have the makeshift to retail. Fewer inventory related charges this year versus last year and we continue to have a benefit from lower product cost. I'd say in our direct business we are probably a bit more promotional, we didn't achieve all the pricing that we had intended in the first quarter. It is our forecast of that -- the expansion will be much more meaningful, as we move into the second half of the year.

Got it. And just from the pricing front, is it a competitive environment still that's kind of dragging that down or is it just the traffic, which is causing you guys or maybe other retailers to be more promotional?

Well I would say that in the first quarter, there was a more significant shift to the business into the second quarter from the first quarter than we had anticipated. So we responded appropriately to manage our inventory position. We feel good about where we exited the quarter. That inventory generally doesn't get better with time. And so entering the second quarter with a clean inventory position as we have was important to us. That was probably more of a issue of traffic than anything else in the quarter.

Got it, that's helpful. And then on Skip Hop, it looks like your $90 million target, so about maybe 5% or so growth. Is that coming from new distribution or is that organic growth that you're expecting?

Most of that will largely be from the core Skip Hop business and we won't start to see anything meaningful from Skip Hop until the second half of the year. But we acquired about a $90 million business, then we'll get some portion of that and we'll probably have some portion of $90 million to $100 million of benefit from them this year, but that will start to come in the second half of this year.

Got it, okay. And lastly on the wholesale front. So it looks like strong replenishment in first quarter. Would you guys expect that to continue into second quarter and throughout the rest of the year or do you think, the first quarter was kind of a one off?

We're planning for stronger replenishment. Back half of the year, we are launching our beautiful new Little Baby Basics line next week actually and Richard, I think showed a slide on that. So we are optimistic about our core products and our replenishment business is an interesting, when you look at the deconstruct of wholesale now, we do have the upfront bookings in Carter's and OshKosh as we've had in the past, but now with the addition of Skip Hop, that's primarily a replenishment business. We've now got about 30% of the wholesale business that will be replenishment going forward and we're optimistic about the prospects of that for the back half of the year.

For our next question we go to Anna Andreeva with Oppenheimer.

I guess I have a couple of questions. I am not sure if you quantified this, but what was the wholesale shift and the lower expense benefit to the first quarter EPS. We are just trying to understand what's driving the magnitude of EPS decline in the second quarter. And then secondly, with quarter year-to-date comps up too. What does that imply for quarter-to-date performance against our both brands comping positively right now. And are you guys seeing trends holdup even post Easter weekend?

So on the first part of your question, Anna, we've estimated about $10 million of operating income probably related to timing issues in the first quarter and that's kind of evenly split between really our wholesale revenues and favorability in spending. Some of which then has an effect on Q2. I'd say the bigger effect on Q2 as we are forecasting good revenue growth, is just higher investment spending. Though some of the initiatives I mentioned around technology, new stores, all of that -- spending in China, all of that will have the effect of depressing earning somewhat. Good answer for the long-term but it will effect Q2, which is our smallest quarter of the year.

Second quarter?

Yes. On the second part of your question, around could you repeat that, Anna?

I guess, the year-to-date up to. What does that imply for April comp? Are both brands comping positively right now? And are you guys seeing the trends hold out even post the strong obviously Easter weekend?

We've had strong business post Easter. Today, as Mike said we got low single digit positive comp in retail. Our Carter's is stronger than OshKosh at this point, but OshKosh has rebounded nicely as Mom is coming out to buy her spring key items as the weather has turned around in the country.

We go next to Jay Sole with Morgan Stanley.

This is the Joe White (inaudible) on for Jay. I just had two quick questions. The first one on your comp outlook. How much of the factor is the improvement in tourism and also the other border (inaudible) stores on your comp outlook. And then secondly on China, you're looking for 50 stores (inaudible) for the year and also seen a lot of good progress in the Tmall. Can you talk about sort of how your awareness has improved there and what sort of change are your expectations?

So the tourist business has been good, Florida, particularly. So Florida is -- we're starting to see more people come back, I would say, it was probably one of the better segments of our business in the first quarter. South East was one of the better segments of the store segments of our business, Northeast was the toughest, just a longer winter up there, but the tourist business, I would actually say has shown some good progress this year. And then with respect to China, I would say we're making good progress. We're expecting sales in China to be up probably over 30% this year. Larger component of the business will be the Tmall business. And so that's the comps, I think, in the first quarter with Tmall probably up 20% or more. As I shared with you, we are recognized by Tmall earlier this year as one of the most popular brands on their website. So we're encouraged by the progress we're making with Tmall. I think the brand awareness will come. One of the reasons why we're opening stores is that all the research we have done, but just its good to have an online presence, but very important to have an offline presence with the stores. We only have about 14 stores opened so far. Supposed to have some portion of 50 or more opened by the end of the year. We were in China a month or so ago looking at the stores, looking at the execution, leading with the Pou Sheng management team, I think they're doing a very good job for us. But this is a good long-term initiative. We didn't do this to grow our business in 2017. It's a good 5, 10, 20 year initiative to build the brand in China. But we're seeing a good response, particularly on Tmall. And as the year goes on, we'll update you more about the stores. But the stores are -- we're very pleased with the execution of the stores so far.

For our next question we go to Jim Chartier with Monness, Crespi and Hardt.

My first question, could you just give us an estimated breakdown for Skip Hop sales for the year? Wholesale, retail and international?

In broad strokes as we have said it, it's likely to be $90 million to $100 million of revenue for us. The majority of that will be wholesale. They have a reasonably small eCommerce business today. We hope to have them up and running on our website later this year, so that will be a contributor. For memory, 30% or so of their business is outside the United States, so that would fall into the international segment. But the majority, we expect to be wholesale revenues from Skip Hop this year.

Okay. And then on Simple Joys, how is the profitability of that business this year? Is it going to be a drag on margins this year and then what's the potential and how is the scale going forward?

Sure. We would not say it's a drag to profitability for this year. I would say, over time, we continue to be excited about that business. We don't comment on the specific profitability, but it is core product, it is a Carter's brand. And we expect, over time, as volume ramps up, that it will be a good profitable business for us.

Great. And then on the acceleration of wholesale shipments in the quarter. What do you attribute that to and does that create some more opportunity for replenishment business later in the half?

I think that the wholesale we had, we had less cancels, less discounts in the quarter and we did have a few different retailers, move product in. As you recall, the product was bought lean for spring, we were booked down low single digits. So as product sales through and retailers have opened to buy money they intent to move that up. So we were fortunate to have a few folks call us and say they wanted the product early, so we shipped it to them. So that was a move and we'll see how it goes. You know January and February were challenging. Where in March we had the benefit of the tax refunds coming out and then we had a strong Easter as did many of our wholesale partners. So as we go into our peak, our spring selling, we're going into May and early summer. But we would hope that the trend continues but too early to tell.

We'll go next to Omar Saad with Evercore ISI.

Hi, this Warren Chang (inaudible) on for Omar. I just had a question on the Amazon relationship. As you ramp up that relationship, how should we think about the net impact on wholesale. Obviously, there's a lot of product -- a lot of Carter's products that are already running through Amazon as your third parties. But now as you approach that channel with your own -- with the Simple Joys brand that's differentiated and optimized for that channel, how should we think about the net impact? So is there a difference in the economics when a third-party retailer sells Carter's through Amazon versus when it's sold directly through you? And how should we think about the accretion on the sales side?

I would say this. I think we want to be every place moms wants to shop for young children apparel. And overtime, we've demonstrated that we're going to continue to grow our market share. It's important as these moms change their shopping behavior that we have our products available in the channel of the distribution as she wants to purchase them. And so we're excited about the Amazon relationship. You've got about a $20 [billion] young children apparel market in the United States. And again, one of our goals is to continue to grow a deeper share of that market and we think as moms are moving to Amazon for some of their products or some of their demand that we need to be there. But in totality, we intend to grow shares. There's obviously mall traffic issues, there are some retailer/wholesalers that are up, some that are down. But in totality, our goal is to grow share and we think that being a partner with Amazon, which is the largest eCommerce retailer in United States, is an important thing for our company.

This whole relationship with Amazon started because Amazon wanted a better experience for their consumers. So if you're going on Amazon when we first started having a discussion with the Amazon, they had a lot of one-off pieces to a lot of duplicate product on the sites for the Carter's brand. We wanted a better experience and from our discussions, we decided to have unique bundling of product making it easier for the consumer to put some good looking outfit together. So the objectives, I think it's going to be a better experience for the consumer, better performance for Amazon and we expect it will be a better performance for us.

Great. And just to clarify, are you only selling Simple Joys in Amazon or are you also selling some Carter's brand?

Both.

We'll go next to Steve Marotta with CL King & Associates.

Richard, you mentioned earlier that average unit cost was a benefit in Q1. And can you talk a little bit about that dynamic in the back half of the year as well as pricing in those expectations in the bookings that brought the gross margin?

We would expect a benefit of -- our product cost will continue. We continue to see good capacity in Asia. We're driving terrific productivity with our new direct sourcing operations in Hong Kong, all of that contributing. And so I expect it to continue to be a benefit. We don't have visibility much beyond the second half of this year, but we have to see a positive for selling our product. For AUR, for pricing, our forecast would be some modest improvement in the second half. So that's what's baked into the gross margin at some point benefit on pricing and continued favorability on product comp.

My second question is, as it relate to the pressure on the retail store traffic in the first quarter. How did that compare against your industry averages?

I'd say in the first quarter, the traffic, generally speaking, was down in the industry some portion of about 10%, ours was better portion of that. And second quarter, traffic was -- in the industry wide was probably down some portion of 6% or 7% and ours was meaningfully better than that, but still down, but meaningfully better than that.

And we go next to John Kernan with Cowen and Company.

Good morning, this is David Buckley on for John. Given the growth of SG&A expenses related to just the retail segment growth, can you just discuss what's driving your big growth in the second half of this year?

Sure, John -- David, there are a number of things that are contributing. We certainly expect that revenue growth will be higher in the second half and what we will forecast to achieve in the first half. As I mentioned, gross margin expansion is expected to be more significant. There is a higher contribution from our accumulative share repurchase activity in the second half of the year and I would say we're planning for a slightly lower growth rate in spending year-over-year. So all those things combined, hopefully, will lead us to a higher both revenue and earnings contribution from the second half.

Its very helpful. And then just a second question, on the wholesale segment, what's your outlook for margin expansion in that segment? We know you've benefited from lower product costs this quarter and some of the previous quarters. Do you expect that going forward?

Well, it's certainly a healthy operating margin business. I don't think it's our intention to look for significant expansion in those margins. We're more looking to grow the top line that's probably more of our objective at this point.

And we go next to Ike Burochow with Wells Fargo.

I guess two questions for you on the U.S. Wholesale channel. I think, Anna asked you about the dollar shift that benefited you in Q1 and it should help you in Q2. Could you just help us quantify that dollar shift so we know how to think about the model a little better. And then just bigger picture question about wholesale. Could you talk at a high level about the department store business and maybe the mass business within the channel?

Sure, I'll start with the first part of the question, Brian will probably weigh in on the second. We've estimated about $5 million of wholesale volume that shifted into the quarter that we had originally planned for second quarter so that's probably the input for your model.

In terms of department stores, it continues to be probably the most challenging part of the business. We talked about bookings before being down low single digits in spring as well as fall for seasonal bookings and the vast majority of that decline was predicated on department store bookings were down. In terms of mass, we've got 2 customers so we don't usually comment that discreetly on that business.

And we go next to Janet Kloppenburg with JJK Research.

A couple of questions, Simple Joys looks great on Amazon. I'm wondering if there's any thought to the brick-and-mortar wholesale accounts and what -- if there maybe backlash from them, given the launch on Amazon, and if any of that is incorporated into your guidance? I was also wondering about SG&A spending and just wondering if you inch that up as with replenishment orders being better than expected, eCommerce business being better than expected, is that a number that has some variability that we should think about as we plan on models? And lastly, on the border store business picking up, is there any reason why given easy comparisons, et cetera, that we shouldn't expect that to continue for the rest of the year?

So Janet on your first question. We're not expecting a backlash. You've got to keep in mind, the history of our company. We historically did business -- a lot of business with the largest retailers in the country.

Right.

2001, we developed a very successful relationship with Target. I recall at that time there was some concern with us taking a Carter's brand to Target. That was beautifully executed by Target and Target is now one of our largest customers. Couple of years after that we launched with Walmart and there was a concerned whether or not there would be a backlash from our customers at the time doing business with Walmart. That wasn't our experience and now Walmart is one of our largest customers. So to Brian's point, we want to do business where the customer is shopping. We want to make sure where ever the consumer is shopping for young children apparel, they have a great experience with our brand. We believe Simple Joys enabled us to provide a better experience for the Amazon consumers. We're not anticipating any backlash.

On your question, Janet, on SG&A. If we have some sales upside that comes to the retail channel that will typically bring with it some additional expense, particularly if it comes via the eCommerce channel if we had more of the upside coming from wholesale, that's a very low fixed cost investment. We try to lever those expenses pretty directly.

But would you shift more spending into marketing? Let's say, if the business was trending better than expected?

Marketing is something we evaluate all the time. Our plans in general have layered additional marketing assets for the second half, for the entire year, if we continue to see the productivity that we're seeing from our marketing spend, we're likely to spend more there.

And just on the border stores?

Yes, on the border stores. Florida continues to strengthen, so we would hope that would continue to help us as we go around the year. But stores along the border of Mexico, they have deteriorated. They start to decline in Q4, they deteriorated further in Q1. So it mixed results in terms of the tourist (inaudible) but we're optimistic on the border stores though (inaudible).

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, thank you. Thank you all for joining us this morning. We appreciate your questions on our business. We'll look forward to updating you again on our progress in July. Goodbye.

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