Earnings Call Transcript - CRI Q4 2020

Operator, Operator

Good day, and welcome to Carter's Fourth Quarter 2020 Earnings Conference Call. On the call today are Mr. Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Brian Lynch, President; and Sean McHugh, Vice President and Treasurer. After today’s prepared remarks, we will take questions as time allows. Carter's issued its fourth quarter 2020 earnings press release earlier this morning. A copy of the release and presentation materials for today's call have been posted on the Investor Relations section of the company's website at ir.carters.com. Before we begin, let me remind you that statements made in this conference call and in the company's presentation materials about the company's outlook, plan and future performances are forward-looking statements. Actual results may differ materially from those projected. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission and the presentation material posted on the company's website. On this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release and presentation materials. Also, today's call is being recorded. And I would now like to turn the call over to Mr. Casey. Please go ahead.

Michael Casey, CEO

Thanks very much. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I'd like to share some thoughts on our business with you. It was a year ago this week that we reported our 31st consecutive year of sales growth. In 2019, we achieved record levels of sales, earnings per share and cash flow. As you may recall, 2020 got off to a good start for us with mid-single-digit growth in sales through February 2020, forecasted to be another good year of sales and earnings growth. By mid-March a global pandemic and national emergency had been declared and the lives of people throughout the world were disrupted. In the months that followed we worked to keep our employees and our store customers safe from the virus. We reduced spending, negotiated lower product costs and improved liquidity. We significantly reduced our exposure to excess inventories caused by temporary store closures. And by curtailing inventory commitments, we were able to improve price realization and margins last year. When the pandemic hit, we accelerated the execution of new capabilities to support the same-day pickup of eCommerce orders in our stores, curbside pickup and the direct shipment of eCommerce orders from our stores. We engaged remotely with our wholesale customers, leveraged our investments in digital product imagery and secured higher bookings for our product offerings this year. We also engaged more deeply and effectively with consumers through social media, building a virtual community of families with young children. During the pandemic, we added over 2 million new eCommerce customers and with the support of our wholesale customers, the online sales of our brands exceeded $1 billion last year. The pandemic was a challenging experience for all of us, but it also enabled us to find new ways to improve our business. We believe the foundation of our company is now stronger because of the pandemic and we are better positioned to weather future storms that may occur. This morning, we're reporting nearly $1 billion in sales for the fourth quarter of 2020. It was the strongest quarter of the year in terms of sales and earnings contribution and the performance was in line with what we had planned. We're reporting a record gross profit margin in the fourth quarter enabled by a stronger product offering, leaner inventories and more effective marketing. As planned, spending grew in the quarter, driven by investments in eCommerce, better staffing and retention in our distribution centers and the partial restoration of compensation for all of our employees. Compensation was curtailed for several months earlier in the year. With respect to sales trends, the fourth quarter got off to a strong start with October sales at 95% of prior year sales, consistent with the very strong demand we saw in September. On a comparable basis, normalizing a holiday calendar shift and excluding the 53rd week. November and December sales were 84% of prior year sales. Our best analysis of the deceleration in demand relative to September and October reflects lower store traffic due to the resurgence of the virus heading into the final months of the year. Recall that health officials warned us all to stay home and avoid traveling over the Thanksgiving and Christmas holidays. And we're lean on inventories heading into the holidays and less promotional than last year. Sales trends improved meaningfully at the end of December and continued into January. We saw growth in January sales and are expecting first quarter sales to be comparable to last year. March is expected to be the largest month of sales and earnings contribution in the first half this year. March sales have historically been driven by Easter holiday shopping and the arrival of spring-like weather in more parts of the country. We're expecting very good growth in the first half of this year as we compare against temporary store closures last year. For the year, we're also expecting good growth in sales and profitability despite the lingering effects of the pandemic. Our Retail segment was the largest contributor to our fourth quarter sales and profitability. All of our U.S. stores remained open for the quarter though we did curtail hours by 13% based on lower traffic. COVID continues to have a material impact on store traffic. Our border and tourist stores have been most affected by the pandemic. Our border and tourist stores represent 10% of our U.S. stores that contributed over 20% of the decline in comparable sales. This past year, we saw fewer international guests in our stores and fewer shopping with us online. In part, we attribute the decline in online demand from international customers to a significant reduction in our promotions this past year. Those who came into our stores in the fourth quarter came to buy. Our store conversion rate grew by 5% in the quarter. The average transaction value grew by 9%, driven by higher units per transaction and better price realization. We ran much leaner in-store inventories in the fourth quarter; recall that we curtailed fall and winter inventory commitments when the risks of the pandemic became clear to us in March. With leaner inventories, we focused our marketing less on promotions and more on the beauty of our product offerings. In the fourth quarter, 94% of our comparable stores were cash flow positive. Our mall stores saw the largest decrease in comparable sales. Ninety percent of our stores are in open-air shopping centers and these stores outperformed the chain. As we shared with you last year, we plan to close about 25% of our 2019 store portfolio upon lease expiration. About 60% of those closures are planned this year, 80% of the closures are planned by the end of next year. These stores collectively contributed over $140 million in sales in 2020 with an EBITDA margin of less than 3%. By comparison, the balance of our stores had an EBITDA margin of nearly 18%. Our focus is on fewer, better, higher margin stores located in more densely populated areas to provide a higher level of convenience to in-store and online customers. Our store closure plan is expected to be accretive to earnings in 2021 and provide a $10 million cumulative earnings benefit by 2025. ECommerce continues to be our fastest growing and highest margin business. ECommerce penetration grew to 45% of our retail sales, up from 38% in the third quarter. Increasingly, we are seeing customers enjoy the convenience of picking up their online purchases at our stores located closer to their homes. Omni-channel sales grew to 24% of our eCommerce orders in the fourth quarter, up from 12% last year. Last year, we leveraged our stores from Maine to Hawaii to ship online purchases from over 600 stores. As a result, we improved the speed of delivering online purchases and improved the profitability of our eCommerce business. We expect the mix of omni-channel sales to grow to nearly 40% of online orders by 2025. Our Wholesale segment was the second-largest contributor to our fourth quarter sales and profitability. Collectively, we continue to see double-digit growth with our exclusive brands which were margin accretive in the quarter. ECommerce sales of our brands through our wholesale customers grew over 30% in the fourth quarter and up over 50% for the year. Sales of our flagship Carter's brand were lower in the fourth quarter, reflecting our decision to curtail fall and winter inventory commitments. Off-price sales were also lower in the quarter. The excess inventories created by temporary store closures and related cancellations due to the pandemic were largely sold through our own stores at higher margins. Going forward, we will continue to use our own stores to move through a higher percentage of excess inventories rather than selling to the off-price channel. Spring selling is off to a good start with our wholesale customers. They too are leaner on inventory, have a lower mix of prior season goods and are seeing better price realization and margins. We're projecting very good growth in wholesale this year, especially in the first half, assuming all stores remain open. Our International segment contributed over 11% of our fourth quarter sales. Canada and Mexico contributed nearly 90% of our international sales. Our eCommerce sales in those markets grew over 60% in the fourth quarter and grew to 30% of our international retail sales from 18% last year. Both businesses performed remarkably well despite COVID-related store closures in the fourth quarter. In Canada and Mexico, many of our stores were closed in the weeks leading up to Christmas. Some of those closures continued through February. The strength in our international wholesale sales was our Simple Joys brand sold exclusively through Amazon. That business nearly doubled in the fourth quarter with Amazon's expansion of our brand into Europe and Japan. The most challenging component of our International segment is with smaller retailers, representing our brands in over 90 countries. Though individually small, collectively they contributed about 15% of our international sales in 2019 and were margin accretive. Wholesale sales to these retailers were down over 50% in the fourth quarter. Based on bookings from these wholesale customers, we're projecting a good recovery in this component of our business this year. Our supply chains did an excellent job, supporting the continued acceleration in eCommerce demand in the fourth quarter. The speed of delivering online purchases was meaningfully better than last year and we saw a related improvement in our customer satisfaction ratings. In 2020, we invested to ensure the safety of our distribution center employees, raised their wages to improve staffing and retention, and invested in technology to improve the speed of delivery. Our supply chain team also negotiated lower product costs for 2021, which may enable us to further improve our gross profit margin this year. In the fourth quarter, we began to see delays in the receipt of products from Asia. Our suppliers were running on average 10 days late due to COVID-related challenges and precautions and transportation delays. Since the reopening of stores last summer, there's been a surge of imports into the United States. As a result, there is an unusual shortage of cargo containers in Asia, further delaying the shipment of our products to the United States. Given the imbalance in the supply and demand for cargo containers, the cost per container has risen significantly in recent months. This is a macro issue. Our best information suggests we'll see delays and higher transportation rates for most of the first half. The surge in imports has also caused congestion at the West Coast ports in California, adding additional time to the receipt of goods. Our wholesale customers are challenged by the same delays. The late arrivals of our warm weather products and there is plenty of warm weather ahead of us. To date, we have not experienced any meaningful order cancellations, but that's a higher risk than usual given the abnormal delays in deliveries from Asia. Since our last call with you, we have revisited the longer-term potential of our brands. By 2025, we expect sales to grow to nearly $3.7 billion with an expansion of our operating margin to 13%. Our growth strategies are focused on leading in eCommerce, winning in baby, aging up our brands and expanding globally. Our Carter's brands have the largest share of the eCommerce children's apparel market in the United States. In the fourth quarter, Carter's online experience was rated as one of the top user experiences among the largest U.S. and European eCommerce websites. We also have unparalleled relationships with the leading retailers of young children's apparel, including Amazon, Target, Walmart, Kohl's and Macy's. Carter's is the number one brand in baby apparel with over four times the sales this year of our nearest competitor. It's been the best-selling brand in young children's apparel for generations of consumers. It's possible that we may see fewer births in the near term due to the pandemic. We've seen births decline almost every year since the Great Recession began in 2007. And since 2007, our sales and earnings have more than doubled. With the promise of vaccines more broadly available this year, government stimulus helping families with young children, historically low interest rates, a strong housing market and an improving economy, we view the risk of fewer births as a potential short-term challenge, but not a longer-term obstacle to our growth. We have the number one market share in the baby and toddler apparel markets. The largest growth in our sales before the pandemic, both in percentage and absolute dollars, was driven by our product offerings focused on children aged 5 to 10 years old. With the continued success of our age-up initiative and the reopening of schools this year, we expect that our age-up strategy will be a good source of growth for us in the years ahead. We plan to extend the reach of our brands globally and profitably. International sales contributed about 12% of our consolidated sales in 2020 and are expected to grow to 15% of sales by 2025. Over the next five years, over 60% of our international sales growth is forecasted to be driven by our multichannel operations in Canada and Mexico. Our brands are also sold through Amazon, Walmart and Costco on a global basis. We expect good growth from these multinational retailers and other retailers who are extending the reach of our brands to families with young children throughout the world. In summary, we strengthened our business this past year and we're expecting a good multi-year recovery from the pandemic. We have built a unique multi-brand, multi-channel model, which we believe is well-positioned to grow and gain market share. We're committed to strengthen our business and provide good returns to our shareholders in the years ahead. I want to thank all of our employees throughout the world who are working to support their families and our company through this pandemic and for their commitment to help us achieve our growth plans. Richard will now walk you through the presentation on our website.

Richard Westenberger, CFO

Thank you, Mike. Good morning, everyone. I'll start with our GAAP income statement for the fourth quarter. Net sales for the quarter were $990 million, a 10% decrease from the previous year. This fiscal year included a 53rd week, meaning the fourth quarter had 14 weeks compared to 13 weeks last year. This additional week contributed $32 million in net sales and about $1 million of operating income. Reported operating income was $134 million, down 18%, and reported EPS for the fourth quarter was $2.26, a decline of 20% from $2.82 a year ago. Now let's look at the full-year GAAP income statement. Clearly, sales and earnings this past year were significantly impacted by the global pandemic. Annual net sales exceeded $3 billion, marking a 14% decline. Reported operating income was $190 million, nearly a 50% decrease, and reported EPS for the year stood at $2.50, down 57% from $5.85 in 2019. Our fourth quarter and full-year results for both 2020 and 2019 included unusual items summarized in our materials. We categorized these items as non-GAAP adjustments to enhance comparability and clarify the underlying business performance. My comments today will focus on our adjusted results, excluding these unusual items. In the fourth quarter, we had a strong finish to what has been a challenging year, meeting our overall financial performance expectations. We experienced solid momentum in key areas of our business. ECommerce comparable sales rose 16% in the U.S. and 47% in Canada. Our U.S. store sales also exceeded forecasts, partly due to improved store traffic in December. A key contributor to our fourth quarter success was gross margin, which expanded considerably compared to last year, building on the improvements seen in the third quarter. Despite lower earnings, our cash flow remained robust, thanks to working capital measures adopted during the pandemic, resulting in a strong balance sheet and liquidity at year-end. As for the net sales in the fourth quarter, they declined 10% to $990 million. On a comparable basis, net sales dropped 13% year over year. I'll discuss our business segment results in more detail shortly, but overall sales declined year over year due to ongoing pandemic disruptions and our earlier decisions to limit fall inventory commitments. Recently, we've also faced challenges with delays in inventory arrivals, which many companies are experiencing industry-wide. We estimate these delays negatively impacted sales by about $30 million in the fourth quarter. Looking at our adjusted P&L for the fourth quarter, even though sales were down year over year, profitability improved significantly, with gross margin increasing by 460 basis points to 47.1%, achieving record quarterly gross margin performance. Thus, despite a sales decrease of over $100 million, gross profit dollars were similar to last year. The increased gross margin was driven by a strong product offering, improved pricing due to effective marketing, and better inventory management including progress in reducing excess inventory. Royalty income fell approximately $1 million compared to last year, mainly due to the timing of spring seasonal goods shipments shifting into the first quarter of 2021 and late-arriving products. Adjusted SG&A rose 5% to $327 million, reflecting the restoration of certain compensation provisions suspended earlier in the year. The fourth quarter included some catch-up expenses for these items. Our employees performed admirably throughout the year under challenging conditions. As we refined our promotional activities in Q4, we reinvested some savings into marketing, particularly digital media, which proved effective. We also made investments to enhance our eCommerce and omni-channel capabilities, including launching a new mobile app, upgrading our websites, and improving distribution center efficiency. Adjusted operating income was $145 million compared to $162 million in the fourth quarter of 2019, with an adjusted operating margin of 14.7%, consistent with last year. Our net interest expense was $15 million, up from $9 million due to the $500 million in new senior notes issued in Q2. We recognized a foreign currency gain of $2 million, and our effective tax rate was around 18%, down from about 19% the previous year. Our adjusted EPS was $2.46, down 12% compared to $2.81 in 2019. Moving to the balance sheet and cash flow highlights, our financial position remains very strong, with total liquidity at the end of the fourth quarter around $1.8 billion, including $1.1 billion in cash, and nearly all of our $750 million credit facility available. End-of-quarter net inventories were up 1% to $599 million, reflecting our decisions to curtail inventory earlier in the year. While overall inventory levels were comparable to last year, store and core brand inventories were significantly lower, while exclusive brand inventories increased. Overall year-end inventories were down compared to the previous year when considering summer 2020 inventory held earlier due to the pandemic. We successfully moved much of this inventory during the year and expect to sell the remaining balance in the first half of 2021. We also made progress in reducing excess inventory in Q4. Our accounts receivable balance dropped 26% year-on-year, primarily due to lower wholesale sales. Accounts payable increased by $290 million to $472 million due to extended payment terms and rent deferrals. Long-term debt rose to nearly $1 billion from about $600 million at the end of last year, reflecting the senior notes issuance and full repayment of revolver borrowings. Operating cash flow for 2020 surged by around $200 million to $590 million, driven by our focus on working capital and spending management, enabling us to achieve this record despite lower earnings. Although we anticipate higher earnings in 2021, operating cash flow is expected to decline this year due to deferred rent repayments and adjustments to vendor payment terms. Regarding our adjusted full-year performance, while 2020 sales and earnings were greatly impacted by the pandemic, our strong product offerings, marketing initiatives, inventory management, and productivity improvements helped minimize overall profit impacts from lower sales. Amid uncertain demand, we prioritized profitability over sales early on in 2020. The effectiveness of our initiatives is evident in comparing the first and second halves of the year. First half sales were heavily influenced by store closures in the second quarter and halted shipments to wholesale customers. In contrast, we achieved record gross margins in the second half due to improved pricing and successful clearance of excess inventory. Profitability followed the gross margin trends, with a more modest decline in adjusted operating income during the second half and an improved adjusted operating margin compared to the first half. Focusing on our business segment performance in the fourth quarter, in our largest segment, U.S. retail, we significantly improved profitability despite lower total sales, thanks to enhanced product margins and solid growth in our eCommerce sector. However, profitability in U.S. wholesale and international segments declined as sales fell, making it challenging to leverage costs in these areas. An uptick in corporate expenses arose mainly from additional compensation provisions and some external consulting spending in the quarter. In the U.S. retail segment, total sales fell 6%, with comparable sales down 9%, demonstrating strong eCommerce growth against lower store sales. While traffic decreased compared to a year ago, it surpassed expectations and outperformed the broader apparel industry benchmark. The adjusted operating margin in U.S. retail improved by 280 basis points to 19.1%, fueled by higher product margins from improved pricing, reduced product costs, and lower inventory provisions. However, these gains were partially countered by investments in our eCommerce business and the timing of compensation provisions. Our investments to enhance our omni-channel capabilities are yielding positive results. The combination of our leading eCommerce platform and nationwide store network presents a significant competitive edge. We experienced strong year-over-year growth in omni-channel demand during Q4, providing customers with better convenience, flexibility, and quicker delivery options. Our store fulfillment options also generally present better economics compared to traditional distribution. Moreover, our ship-to-store and in-store pickup options drove substantial traffic to our stores, accounting for 1.7 million store visits in 2020, with around 25% of customers making additional purchases while picking up their online orders. The fourth quarter also marked the arrival of the first babies conceived during COVID. In light of this, we launched a new digital brand campaign called Hello Optimism, celebrating these new babies as part of Generation Optimism. The campaign featured real families and their 2020 babies, generating a strong positive response and boosting brand awareness and favorability, while introducing Carter's as the most trusted baby brand to a new parent audience. We continued to innovate our marketing in Q4 by creating engaging, emotionally driven digital experiences for families, such as virtual visits with Santa and PJ parties with Leslie Odom Jr. This outreach resonated well with millennial parents, resulting in 1 million new online customers in 2020 and a record 8 billion media impressions throughout the year, significantly surpassing 2019 figures. Overall, Carter's enjoys the highest engagement levels on social media among major players in the children's apparel market. We are dedicated to expanding our brand reach to diverse consumers as part of our broader focus on diversity and inclusion. Recently, we launched an HBCU apparel collection in collaboration with HBCU alumni influencers to celebrate historically black colleges and universities. We also partnered with Sisters Uptown Bookstore in New York City to host a Black History Month reading series emphasizing historic black figures and their contributions to society. In the international segment for Q4, net sales fell 13% to $114 million amid considerable disruptions in our Canadian and Mexican stores due to pandemic-related closures. However, eCommerce demand in Canada was strong, with eCommerce comps rising nearly 50%. As we move forward, we anticipate a rebound in our international operations in 2021. The adjusted operating margin for international operations was 13.3%, down from 16.2% a year ago, reflecting cost de-leverage from lower sales, eCommerce investments, and catch-up compensation provisions, though this was partially offset by reduced inventory costs. As outlined in our strategic positioning, we believe there are multiple growth opportunities for the company in the coming years. Our brand portfolio is well-established and trusted across generations. We maintain a unique multi-channel business model, including a growing direct-to-consumer segment. Additionally, we've demonstrated a strong track record of operational performance and cash generation. In summary, our mission remains to lead the market, with a focus on eCommerce, baby products, and global expansion. Although predicting the future is challenging, we anticipate mid-single-digit growth in overall net sales and low-single-digit growth in U.S. retail, coupled with mid- to high-single-digit growth internationally. We expect our profitability to outpace sales growth, targeting low double-digit growth for operating income. We foresee significant cash generation in the upcoming years, which will allow us to invest in our business, consider M&A opportunities, repay debt, and return capital to shareholders. We have various factors contributing to our planned growth, and our outlook for 2021 indicates good growth in both sales and earnings. We are forecasting a consolidated net sales increase of about 5%, with anticipated growth in operating income and operating margin. Adjusted EPS is expected to rise about 10%, slightly lower than operating income growth primarily due to higher interest costs and a projected higher tax rate as more income is expected to originate in the U.S. this year. The first half of the year is expected to be the primary period for sales and earnings growth due to comparisons with last year's initial pandemic impacts and timing discrepancies in wholesale shipments and spending. Although we do not anticipate replicating last year’s cash generation due to deferred rent repayments and changes in working capital, we expect 2022 to normalize for significant operating and free cash flow production. While uncertainty persists regarding COVID-19's ongoing impact, we remain cautious in our planning, which has historically served us well. In the first quarter, we expect sales to be similar to last year, but we anticipate a significant increase in profitability, expecting operating income around $30 million and adjusted EPS of about $0.25 compared to losses last year. We are monitoring the ongoing delays of arriving products across our channels and the potential effects on spring product sales, alongside rising transportation costs, which may lead to additional expenses beyond our current plans.

Operator, Operator

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

Ike Boruchow, Analyst

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

Michael Casey, CEO

Sure, sure. So Ike, with respect to the births, we have not to date seen any meaningful change in the performance of our baby business. Keep in mind, a very high percentage of our business with Walmart, Amazon and Target is focused on baby and that's been the strength of our business this past year. Online demand for our baby apparel has been terrific. That said, the intent is up on this. Over the years, we've seen a correlation between strength to the economy and impact on birth rates, and we've all known people in our family or friends who have delayed marriages, and when you delay marriages, more often than not you're delaying starting a family; so we're keeping an eye on it. Best information we have is there might be 300,000 to 500,000 fewer children born in the United States this year. It's not going to happen on January 1, but at some point during the course of this year, we may see fewer births, and our best analysis would suggest typically a family will spend some portion of about $700 on a newborn child in that first year. So, $700 per child on that range of 300,000 to 500,000 fewer births is a potential exposure for the market of some portion of $200 million to $350 million. We own a third of the newborn market, say that zero to 10 years old child. We own a third of that market. So, for us, it's some portion of $70 million to $100 million revenue exposure. Again, if that all happened on January 1st, which it won't. And so anyways, we're going to keep an eye on it. With every quarterly call, we'll update you on what we're seeing. But to date, we haven't seen any meaningful change in the performance of our baby product because of that exposure. I actually say Little Baby Basics, which is the core of our Carter's brand. Particularly in the baby space, there is nothing more beautiful in the market than our Little Baby Basics. I would say that's probably the best performance we've had this past year and probably in three or more years. So, we'll let you know as we go through the year. And we are mindful that this is an exposure that's been taken into consideration in the guidance that Richard's sharing with you this morning, and we'll see what impact, if any, it has on us in the balance of the year.

Richard Westenberger, CFO

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

Operator, Operator

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

Kelly Crago, Analyst

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

Michael Casey, CEO

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

Richard Westenberger, CFO

One thing I want to share about the store closures is that nearly all are happening when our leases expire, since we've been in these locations for 10 years. We have been monitoring traffic patterns and increasingly assessing how our stores support eCommerce customers. We are analyzing omni-channel sales, specifically looking at what percentage of our customers are choosing to pick up their online orders on the same day from stores closer to their homes. After a decade in a location, when the lease is up for renewal, we find that there are better opportunities for us in nearby markets. Therefore, most of these closures are occurring at the end of a 10-year lease, and we are choosing to exit rather than reinvest in centers where co-tenancy and traffic patterns have changed, as we see more favorable opportunities in adjacent markets.

Kelly Crago, Analyst

Thank you. I’d like to follow up on Ike's question regarding the sales expectations for Q1. Why do you anticipate flat sales in Q1 when March is the easiest comparison? You noted that sales were positive in January. I'm unclear about February, but is it connected to the supply chain disruptions? Can you provide any insights on this and how long you expect these issues to persist? Thank you.

Michael Casey, CEO

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

Operator, Operator

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

Susan Anderson, Analyst

Hi, good morning. I'm looking at gross margin and SG&A for the first quarter. It sounds like you expect gross margin to improve. I'm curious how much the supply chain issues might impact that, if at all. Additionally, are you still anticipating that SG&A will face pressure in the first quarter similar to the fourth quarter? Thanks.

Michael Casey, CEO

I would say that we expect SG&A to increase slightly, but not to the same extent as it did in the fourth quarter. We are still making our investments, and expenses will follow a more normal pattern throughout the year. Last year, at the onset of the pandemic, we temporarily suspended many expenses. Therefore, you should see a more standard accrual of expenses, including for performance-based compensation. Regarding gross margin, we are anticipating a nice increase in the first quarter. Keep in mind that last year we incurred significant charges for excess inventory in the first quarter, and comparing against those charges should positively impact gross margin. We also expect to see continued progress in pricing and improvements in product costs, all of which should benefit gross margin.

Susan Anderson, Analyst

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

Michael Casey, CEO

Sure. The best outlook would suggest our latest models are focused on a 13% operating margin. We'll have a higher mix of eCommerce sales, which is our highest margin business. We will have a lower mix of lower margin stores and we expect to make continued progress on price realization through a stronger product offering, more effective marketing, and inventory management. So we've got some good initiatives. We're trying to be cautious given the uncertainties this year, but the trend in our business, both in sales and profitability, is up.

Operator, Operator

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

Jay Sole, Analyst

Great. Thank you so much. Maybe, Richard, just wondering if you can elaborate a little bit on the full-year guidance. Just given the Q1 this year should be pretty well above last year, and Q2 probably should be a similar story because the compares are obviously very easy. The full-year guide sort of implies that the back half of the year will be significantly below 2020. Just wondering sort of what are the components, you mentioned the birth rate, Mike mentioned the birth rate, what are some other factors that are sort of implied in that back half guidance for this year?

Richard Westenberger, CFO

I don't think we provided specific guidance for the latter half of the year, and that was intentional. We are still early in the year and facing considerable uncertainty, so we need to allow for some flexibility, as the year may unfold differently than we expect. As mentioned earlier today, the first half is anticipated to be the larger contributor to revenue and earnings growth, largely due to the disruptions from the previous year when stores were closed. We are facing significant eCommerce comparisons in the first half. Some significant changes to our promotional strategy were implemented later in the year, which led to substantial gross margin gains in the second half. From a comparison standpoint, we are optimistic that stores will remain open throughout the year, which would be beneficial. We also hope for a recovery in wholesale, particularly in the first half, with some positive impacts in the second half. There are various timing differences that we will need to navigate this year. Last year was unusual with fluctuations in the P&L, and we expect 2021 to reflect some of that as well. Planning is challenging this year due to timing differences in wholesale shipments. For example, Little Baby Basics, a key wholesale launch, was a second-half event last year but is expected to occur in the first half this year if it follows its usual timeline. There will be many variables to consider, and we will do our best to outline those for you. However, I wouldn’t say we’re entirely pessimistic about the second half, and we expect to gain clearer insights as the months progress.

Michael Casey, CEO

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

Richard Westenberger, CFO

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

Jay Sole, Analyst

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

Michael Casey, CEO

We are anticipating strong growth in international markets, with around 60% of that growth expected to come from Canada and Mexico. These regions performed exceptionally well last year, especially in the fourth quarter, despite numerous store closures. Approximately 30% of our international growth will be generated from wholesale partners, including Amazon and other multinational retailers. We have secured bookings for the second half of this year from smaller retailers globally. This wholesale business has historically provided good margins for us, with the remaining growth coming from Skip Hop International. We expect significant growth from our Amazon business, which is off to a strong start. Although we have had a partner in Europe for several years, the growth from that collaboration has been modest. However, since launching Simple Joys on Amazon in Europe, we have seen much stronger performance compared to our previous partner. Therefore, we foresee considerable growth with Amazon in international markets over the next five years.

Operator, Operator

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

Michael Casey, CEO

Thank you all for joining us this morning. We will provide another update in about eight weeks, once we have March behind us, which is our busiest month in the first half of the year. By then, we’ll have a clearer picture of how the year is progressing and how we are managing the transportation delays from Asia. We look forward to updating you again in April. Until then, goodbye everyone. Take care and stay safe.