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Carter's Inc (NYSE:CRI)
Q4 2019 Earnings Call
Feb 24, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Carter's Fourth Quarter 2019 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 fourth quarter 2019 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 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. On pages 2 and 3 of the presentation, the company has included GAAP income statements for the fourth quarter and full year 2019 and 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.

I would now like to turn the call over to Mr. Casey. Please go ahead.

Michael D. Casey -- Chairman and Chief Executive Officer

Thanks very much. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I'd just share some thoughts on our business with you. Earlier today, we reported sales of $1.1 billion for our fourth quarter. That's the strongest quarterly sales ever reported by our company. Our growth in sales was driven by our retail and international businesses. We saw a good demand for our brands over the holidays, with comparable retail sales in the United States, up over 2% in the combined November-December time period.

E-commerce drove the growth in our retail sales. Online sales grew to 36% of our total retail sales in the quarter, up from 30% last year. As expected, U.S. wholesale sales in the fourth quarter were a bit lower than the last year, we had a nearly 40% decrease in off-price sales, which were elevated last year, due to the Toys"R"Us and Bon-Ton closures. That decrease in sales, was largely offset by double digit growth in our exclusive brand sales to the largest retailers of young children's apparel, which are Target, Wal-Mart and Amazon.

Our growth in international sales in the quarter was driven by a strong finish in Canada, with comparable retail sales up about 8%. Earnings in the quarter were lower than last year, and reflect the impact of lower traffic to our U.S. retail stores. Recently, consumers are choosing the convenience of shopping with us online. E-commerce continues to be our fastest growing and highest margin business.

With respect to business trends, demand was a bit inconsistent in October, as consumers slowly transitioned into cooler weather outfitting. We have positive retail comps in October and better comps in the holiday shopping period. Our store traffic in the United States lagged average market trends in October and November, and then meaningfully outperform market trends in December. Our spring product offerings got off to a good start earlier this year, but sales trends have slowed in recent weeks. Our comparable retail sales in the United States are down about 1% year-to-date. Growth in e-commerce sales is largely offsetting lower store sales.

For the year, we're reporting record levels of sales, earnings per share and cash flow. We gained share in 2019 and strengthened our position as the leader in young children's apparel, with the largest share of the $27 billion U.S. market. We improved price realization and significantly mitigated our exposure to tariffs imposed on China imports, and we negotiated lower product costs for 2020. In 2019, we distributed nearly 90% of our free cash flow to our shareholders, through dividends and share repurchases. Earlier this month, our Board of Directors declared a 20% increase in our company's quarterly dividend, and authorized an additional $500 million in our share repurchase plan, which we expect to execute in the years ahead.

Since our last call with you, we have revisited the growth, we believe is possible over the next five years. In setting our new growth objectives, we're mindful that market conditions have been challenging in recent years, and laid on the growth we had otherwise thought possible. With fewer annual births in the United States, the closure and downsizing of several large retailers and fewer international shoppers likely affected by the stronger dollar, young children's apparel market declined 6% last year. Despite these market challenges. We believe we can outperform the market, and good growth is possible in the years ahead.

In round numbers, we believe we can grow sales by over $400 million by 2024. We expect more than half of that growth will be driven by our U.S. e-commerce business. At $100 million in growth is projected in each of our U.S. wholesale and international segments. We have the potential to outperform these growth objectives. Our projections reflect over $2 billion in cash flow from operations over the next five years. Currently, we believe there are relatively few attractive acquisition opportunities, we plan to continue exploring those opportunities we believe, would provide a new source of growth and attractive returns on investment. Absent better alternatives to allocate capital, we plan to continue returning excess capital to shareholders, through share repurchases and dividends.

We believe Carter's is uniquely positioned to gain share in the young children's apparel market. We provide non-discretionary essential core products and exceptional value to all families with young children. We are the largest specialty retailer of children's apparel and the largest supplier of children's apparel to the largest retailers in North America. Our brands are sold in over 18,000 store locations and on the largest online platforms in North America. Wherever consumers are shopping for children's apparel, they are likely to see a strong presentation of our brands.

Our growth plan is focused on four key strategies which are, winning in baby, aging up our brands, leading in e-commerce, and expanding globally. Carter's is the number one brand in baby apparel with five times the share of our nearest competitor. Our research suggests that nearly 90% of millennials shopping for newborn apparel last year purchased our Carter's brands. Though annual births in the United States have trended lower in recent years, we have increased our customer base through effective marketing strategies and extensions of our product offerings.

The closure of Toys"R"Us and Babies "R" Us in 2018 was disruptive to the baby apparel market in the United States. We believe Target, Wal-Mart, and Amazon were the largest beneficiaries of those closures, and thankfully, they are three of our top five wholesale customers. Nearly 20 years ago, we developed exclusive baby apparel brands for Target and Walmart, and in more recent years, we launched an exclusive brand for Amazon. In 2019, we saw double-digit growth in our exclusive brand sales, which collectively are margin accretive to our company's operating margin.

We expect Target, Wal-Mart, and Amazon will continue to be a good source of growth for us in years ahead, enabling low single-digit growth in wholesale sales. Despite a 32-year low in the U.S. birth rate, there are still 3.8 million beautiful babies born every year in the United States. 3.8 million new reasons to shop with Carter's. Our analysis suggests a possible stabilization, and the number of annual births in the years ahead, with a peak population of men and women in their late 20s and early 30s, a time when many begin to start their families.

We have the number one market share in baby and toddler apparel markets and a growing share in the 5 to 10-year-old apparel market. A few years ago, we extended the size range of our Carter's and OshKosh brands to serve the needs of slightly older in larger children. 2019, those additional [Indecipherable]

Generated over $100 million in sales. We refer to this initiative as our age-up strategy. We believe this strategy will enable Carter's to increase the lifetime value of its customers.

The largest growth in sales in 2019, both in percentage and in absolute dollars was driven by our product offerings for the 5 to 10-year-old children. Mid-single-digit growth in our toddler and kids apparel sales, helped us offset a 1% decline in our baby apparel sales. With the continued success of our Age of Initiatives and projected stabilization of birth trends in the years ahead, we expect continued low single-digit growth in our apparel sales.

Our Carter's brands have the largest share of the e-commerce children's apparel market in the United States, with twice the share of our nearest competitor. With the support of our wholesale customers, we expect the total online purchases of our brands to exceed $1 billion this year. In our direct-to-consumer business, we provide a multi-brand website experience with three of the best-known brands for families with young children, including OshKosh B'Gosh and Skip Hop.

Last summer, we completed a year-long effort to strengthen the experience of shopping with us online, improve the product presentation, navigation search capabilities and checkout experience. In the fourth quarter, Carter's online experience was rated superior to a majority of the 60 largest U.S. and the European e-commerce sites.

In recent years, we've invested in technology, which enables the same day pick up of e-commerce orders, and full access to the broader scope of our product offerings to consumers shopping in our stores. This past year we tested with success, our new capability, which enables us to fulfill e-commerce orders from our stores. We believe this initiative will improve the productivity of our inventory, increase the speed of related deliveries to three days or less, and reduce the cost of those deliveries. Collectively, the improvements to our online experience in new omnichannel capabilities, meaningfully improve the trend in e-commerce sales in the second half of 2019.

Given the secular shift to online shopping, we expect our e-commerce penetration to total U.S. retail sell sales grow from 32% in 2019%, to 42% by 2024. Our retail stores will continue to be an important part of the consumer's experience, with our brands. That said, over the next five years, we expect to close more stores, than we will open. Our co-branded stores continued to be our best performing store model. It provides the most productive Carter's and OshKosh product offerings in one convenient location. Given the success of our co-branded store model beginning this year, all Carter's stand-alone stores will carry the very best of our OshKosh B'gosh product offerings, including the iconic OshKosh overalls and school uniforms. While OshKosh stores will carry our Carter's created sleepwear, underwear and socks.

Our merchants have worked this past year to eliminate unnecessary redundancies in our Carter's and OshKosh product offerings, which we expect will improve our sell-throughs and profitability.

To further improve the consumer's experience shopping with us online and in our stores, w';ve launched a Carter's credit card program last summer. It's an enhanced loyalty program, that provides instant credit, advanced notice of special offerings, free shipping on all orders, and extra points in related savings on future purchases. To-date, nearly 4,000 customers have enrolled in our credit card program and 20% of those customers were new to our customer database. The profitability of sales through our credit card program is higher, than other credit card transactions. With reasonable assumptions, we believe this new credit card program could contribute $20 million or more to our annual earnings by 2024.

Our stores and websites have become interdependent in recent years, and increasingly referred to as the omnichannel. In 2019, we saw a 10% increase in our omnichannel customers. Our highest value customer preferred shopping with us online and in our stores. These customers spend nearly three times the annual amount of our store only or e-commerce only customers.

We believe we have a competitive advantage, owning three great brands, serving the needs of families with young children. Our multi-brand buyers now represent 44% of our customer base and also spend three times the annual amount of our single brand customer. We plan to extend the reach of our brands globally and profitably. Our brands are sold in over 90 countries through our own operations and relationships with retailers throughout the world. We will continue to pursue opportunities that enable profitable growth in new markets.

International sales contributed over 12% of our consolidated sales in 2019 and are expected to grow to 14% of sales by 2024. Over the next five years, about 70% of our international sales growth is forecasted to be driven by our multichannel operations in Canada and Mexico. Over the past five years, we have made significant investments in consumer facing and revenue driving capabilities in the United States. We plan to leverage those investments and extend those capabilities to support the growth we envision possible in North America. Our brands are sold through Wal-mart, and Costco on a global basis. In late last year, Amazon launched our Simple Joys brand in Europe. 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.

We lost ground in our operating margin over the past two years and plan to return to margin expansion beginning this year. Earlier this year, we executed an organizational restructuring across multiple parts of our company. The objectives of this initiative are to improve the productivity and efficiency of our organization and to reduce the related cost of operations by about $15 million a year. This initiative is a component of a broader multi-year, $100 million productivity initiative, which we believe will enable us to improve our operating margin to about 12.5% by 2024. Other areas of opportunity being pursued, include better inventory management, which we believe will enable improved price realization. Improved marketing effectiveness through consumer segmentation and personalization, and a new digital product development process, which we believe will enable, will strengthen our product offerings, improve forecast accuracy, and lower costs.

With respect to our supply chain operations over the past few weeks, we've been monitoring the ramp up in production at our suppliers in China. Travel restrictions and an abundance of caution to contain the coronavirus will impact production schedules and the timing of shipments this year. Our employees in Hong Kong and China are largely back to work and in contact with our suppliers. Many factory workers were given an additional week or more time to return after the Chinese New Year holiday. They normally would have returned the week of February 10.

Our suppliers have not yet determined with certainty, the impact of production delays. Today, we'll share our best estimates of the growth we believe is possible this year, exclusive of any buyers related delays. We expect by our next call in April, we'll have better visibility to the potential impact on our growth plans this year.

Over the years we've managed through the cotton crisis, port strikes and other challenges. We have a time tested team of professionals including over 100 employees based in Asia, who will help us manage through this latest challenge.

In summary, we continued to achieve growth in a very challenging retail market and the outlook for our business is good. 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 for enabling our 31st consecutive year of sales growth and their commitment to achieve our growth plans.

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

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

Thank you, Mike. Good morning, everyone. Fourth quarter capped off another eventful year for Carter's, so let me begin on page 4, where we've summarized a few highlights of 2019. Despite a challenging retail and young children's apparel market, we were able to deliver growth, both on the top and bottom line. We continue to grow our direct to consumer business, particularly in the e-commerce channel. We invested in improving our website and building on our omnichannel capabilities and we strengthened our store portfolio, by opening a number of new productive co-branded locations. Our exclusive brands, available at Target, Wal-Mart and Amazon, also posted very notable growth

In 2019, we also achieved record operating and free cash flow, which enabled us to continue to return meaningful capital to our shareholders through dividends and share repurchases.

On page 5, we faced some headwinds in the past year, as the young children's apparel market in the U.S. declined about 6%. Despite this backdrop, we increased our industry-leading market share in the U.S. by 40 basis points to 13.8%.

Our full year adjusted P&L is included on page 6 for your reference. Full year net sales were just over $3.5 billion, was $401 million in adjusted operating income, and adjusted EPS of $6.46, which represented growth of 3% over 2018.

Turning to page 7 and our adjusted P&L for the fourth quarter; fourth quarter consolidated net sales were $1.1 billion, up 1% versus the prior year, which was consistent with our previous guidance. Our U.S. retail and international businesses drove our growth in the quarter. Our adjusted gross margin was 42.5%, down 70 basis points versus last year, reflecting higher inventory provisions and higher tariffs on products from China. Royalty income was $7 million in the quarter, down about $3 million versus last year, reflecting the conclusion of a licensing agreement and the in-sourcing of a previously licensed product category.

Spending was up 1%, in line with top-line sales growth. Expense control was a priority throughout all of 2019, with full year adjusted SG&A growing less than 1%, and we achieved 30 basis points of leverage. Adjusted operating income was $162 million in the fourth quarter, representing a 14.7% adjusted operating margin. Below the line net interest in the fourth quarter was comparable to 2018, and we had a slight gain from foreign currency in Q4 of this year compared to a loss a year ago. Our average share count declined 4% compared to last year, reflecting the benefit of our use of capital for share repurchases. On the bottom line, fourth quarter adjusted EPS was $2.81 compared to $2.84 in the prior year.

Moving on to page 8, with some balance sheet and cash flow highlights. We ended 2019 in a strong liquidity position, with cash on hand and available revolver capacity totaling nearly $650 million. Year-end inventories grew 3% year-over-year, consistent with our expectations. On a unit basis, inventories were comparable with last year. We feel good about the quality of our inventory entering the first quarter, with excess inventory at the end of the year down meaningfully versus a year ago. Our leverage at the end of the year was modest, and we continue to have significant flexibility to invest in the business, and to pursue growth alternatives that we find attractive. We summarized here details on our strong cash flow in 2019 and our progress in returning capital to shareholders, I'll speak a bit more about return of capital in a few minutes.

On page 10, we summarized our business segment results in the fourth quarter. All of our business segments delivered operating margins in the mid to high teens, benefiting from the $1 billion topline revenue in the quarter. We posted year-over-year margin improvement in our international business, but margins were lower in our U.S. retail and U.S. wholesale businesses, for reasons which I'll cover in a moment.

Turning to fourth quarter results for the U.S. retail segment on page 11; total U.S. retail segment sales grew 2% in the fourth quarter, comparable sales increased 1.6%, driven by strong e-commerce growth. Comparable sales during the combined November-December holiday period were up 2.1%, stronger than what many of our peers across the industry achieved during the same period. Relative to our forecast, fourth quarter sales came in somewhat below our expectations, in part we think due to the shorter Thanksgiving to Christmas selling period this year. In 2019, we made good progress in improving our retail store portfolio. During the year, we opened 43 stores and closed 25. Majority of the door closures were older, underperforming store locations.

Adjusted segment margin for U.S. retail was 16.3% in the fourth quarter compared to 16.9% a year ago. This performance reflects higher product costs and inventory related provisions, partially offset by improved price realizations and expense leverage. Recapping the full year for U.S. retail net sales grew 2%, and comparable sales grew 0.4%. 2019 represented our 13th consecutive year of positive comps in our U.S. Retail business.

Turning to page 12, with an update on our omnichannel initiatives. 2019 was a year of good progress in strengthening our omnichannel capabilities, and we saw meaningful acceleration of consumers utilization of these capabilities in the fourth quarter. Our same-day buy online pickup in store service gained significant traction, particularly as the Christmas holiday drew closer and consumers sought out the convenience of in-store pickup of their purchases, versus waiting for shipment to their homes. We also saw a significant increase in the number of consumers choosing to have their online orders shipped to their local store. It is obviously encouraging, as it drives additional traffic to our retail stores.

In the fourth quarter, we successfully tested fulfillment of online orders from a number of our store locations.Based on the success of this test, we're planning to expand the use of our stores for online order fulfillment later this year. Closely related to our omnichannel capabilities is the Carter's credit card, which is a new capability and consumer offering, which launched midyear in 2019. The card is integrated with our successful rewarding moments loyalty program and provides consumers a number of benefits, including free shipping on e-commerce orders.

On page 13, we're very pleased with the performance of our commerce business in the fourth quarter. Earlier in 2019, we relaunched our website. This was a comprehensive initiative, which made our site easier to navigate and shop, especially for consumers using mobile devices. We made improvements and enhancements across multiple areas and we've seen a meaningful lift in conversion and sales growth, since the new site went live.

On page 14, we have a photo of a new co-branded mall store just north of Atlanta. As we discussed on the previous call, Gymboree was a significant retailer of young children's apparel doing over $600 million in annual sales at the time of its exit from the marketplace. While we remain cautious on mall real estate in general, we believe Gymboree's exit provides an opportunity for us to capture additional market share, by opening select mall stores. This particular store is a former Gymboree location, which is now reopened as a bright and inviting Carter's OshKosh co-branded store. The store is approximately 2,300 square feet, smaller than our traditional co-branded store of roughly 5,000 square feet. This store is focused on baby and toddler products, which are among our most productive assortments in both sales and margins.

We have about 10 of these baby toddler mall stores today, and performance so far has been very encouraging, both in terms of sales and profitability. Our analysis suggests that about 30% of consumer shopping in these new format stores are new customers for us, individuals not previously in our customer file. We plan to open approximately eight more of these stores in 2020, if performance continues to be attractive. We see the potential, to have roughly another 80 of these stores, which would represent an incremental sales opportunity of about $80 million to our current long-range plan.

On the next page, we've summarized the latest information on our social media presence and influence, Carter's continues to lead industry peers in the number of followers on Facebook and Instagram, and our Instagram posts continue to drive the highest consumer engagement. In the fourth quarter on Instagram we added nearly three times the number of net new followers as the next closest brand in young children's apparel.

On pages 16 and 17, we've included some examples of our Carter's and OshKosh marketing for the upcoming spring season. The former weather and the Easter holiday on the horizon. Carter's and OshKosh have the products that families need, our marketing highlights, current spring seasonal product, including options for Easter family dressing, as well as our year round iconic products, such as Carter's pyjamas and OshKosh denim.

Turning now to page 18, with results for our U.S. wholesale business; fourth quarter net sales in U.S. wholesale were $349 million, down 1% compared to the prior year. We had meaningfully lower sales to the off-price channel in the fourth quarter of this year, offset by continued good growth and demand for our exclusive Carter's brands. Fourth quarter segment operating margin was 19.2% compared to 21% in the fourth quarter of 2018. This performance reflected higher inventory provisions, increased bad debt expense, changes in customer mix and lower royalty income. For the full year in 2019, net sales in our U.S. wholesale segment grew 2% with record sales with our top four customers. With full year wholesale sales up $1.2 billion, our wholesale business has now recovered to the level of net sales before the disruptive bankruptcies of Toys "R" Us, Bon-Ton and Sears.

Looking forward, we remain focused on several key areas, which we believe will drive our wholesale business. A few of these are listed on page 18. We want to build on our tremendous authority in the core baby category. Many of our wholesale customers are excited about developing the toddler age segment with us, where like baby, we have the largest market share.

The fastest growing part of many of our customers' businesses, is e-commerce. We continue to actively support our customers' efforts online and we are benefiting from their growth in this channel.

On pages 19 and 20, we've included screenshots of Target's and Walmart's web pages, both of these retailers are building significant online businesses and leveraging on the strong in-store presence of the Just One You and Child of Mine brands. We continue to actively support the growth of these brands with each of these winning retailers through new and innovative products, and through marketing and branding investments. On page 21, we continue to see substantial growth in our Simple Joys brand, which has quickly become one of the more significant apparel brands on Amazon.

Moving to page 22 and international segment results for the 4th quarter. International sales increased over last year in the fourth quarter, driven by Canada, and our other businesses outside of North America. We had excellent performance in Canada, where we posted a nearly 8% increase in comparable retail sales.

During 2019, our Canadian team was able to add to our market share, which is now over 19%, further solidifying our leading position in Canada. Profitability and international was comparable overall, with an improvement in this segment's operating margin.

On page 23, we continue to make progress in Mexico. During 2019. We opened four new retail stores, which mirror our successful co-branded retail store format in the U.S. and Canada. These stores represent a larger footprint than our legacy stores in Mexico, allowing for a more complete product and brand experience. Results to date have been encouraging. The stores shown here opened just before Christmas and is off to a good start.

We're planning to open an additional four stores in Mexico in 2020, and we are seeing opportunities to double the size of our retail business in this market in the next five years. We also launched e-commerce operations in Mexico in the fourth quarter. Page 24 is a screenshot of the Mexico website homepage, remains early days, but consumer response has been strong. The e-commerce market in Mexico is still developing relative to the U.S., but we believe it will be a good source of growth in this important market going forward.

On page 25, and a new opportunity for us, we have certainly enjoyed a large and loyal base of customers from Brazil, who shop with us here in the United States. We believe we have an opportunity to make our brands available in Brazil itself in a more meaningful way. We recently finalized an agreement with an existing wholesale partner Riachuelo, to develop the Brazil market. Riachuelo is a sizable and successful retailer in Brazil, and has carried Carter's branded products in its stores for the past several years. Under this new agreement, Riachuelo will become our exclusive partner in Brazil, and in 2020 will begin opening stand-alone Carter's branded retail stores throughout Brazil.

In terms of our longer term objectives, we've summarized some thoughts on page 27. Our focus as a company is clear, as articulated in our mission statement to serve the needs of all families with young children and to be the world's favorite brands in the young children's marketplace. Over the next five years, we believe it's possible to grow our top line at a low single digit rate. This would have us reach nearly $4 billion in net sales, with the brands we own today. Additionally, we believe we can improve our margins through both expansion in gross margin, and good management of spending to achieve mid single-digit growth in operating income. We're assuming continued share repurchases, which would enable higher growth in earnings per share, than what we are forecasting for operating income.

While we have many priorities at the company, I think three of the most important are summarized at the bottom of page 27. First, we're obviously interested in top line growth, but we want sales to come with profits. Secondly, we are committed to improving the profitability of our business overall. And finally, we believe strongly in returning excess capital, that the business may generate to our shareholders.

Some of the building blocks of our planned growth are summarized on page 28. First, everything starts with a great product. Our brands and products are known for the exceptional value which they provide to consumers. We continue to invest to ensure that we have compelling and competitive product assortments one of the hallmarks of our company has always been broad market presence, both in the wholesale channel and in our own retail businesses. We want to be present where parents are shopping. The success in recent years of our exclusive brands is a good example of providing great product and compelling value in those retailers where moms and dads are shopping frequently, to meet the needs of their families.

In our U.S. retail businesses, we have a powerful combination of convenient easy-to-shop retail stores, and what we believe is the industry-leading online site for young children's apparel. We've invested in omnichannel capabilities, as the store in online worlds continue to converge. These capabilities will continue to grow and evolve, contributing we believe to good growth in our direct-to-consumer businesses over time.

Finally, we see good demand for our brands outside of the United States. We will pursue opportunities to capture this demand thoughtfully, with a focus on growing international sales profitably. In most markets outside of North America, we believe aligning ourselves with strong local market partners will be key to our successful execution.

On page 29, we've recapped what we believe will be some of the more significant sales and margin drivers over the next several years. We believe the majority of our growth will be driven by e-commerce, so many of our investments are oriented around supporting this business in particular. We will continue to optimize our retail store portfolio, closing older, less productive locations in favor of co-branded stores closer to the consumer. We will also assess alternate store formats and locations, such as the baby toddler mall store I discussed earlier.

Wholesale and international are also expected to contribute to growth over the next five years. We are targeting about 100 basis points of expansion of our consolidated operating margin by 2024. We believe, there are a number of aspects of our business, which will contribute to achieving this objective. First as Mike said, we have a number of initiatives intended to drive greater inventory productivity, which we believe will enable higher price realization and thus improved gross margin. These initiatives are a combination of process improvement, enabled in part by deploying new technology in the business.

Second, some of the new sources of revenue, which we've added in recent years have not yet reached their full potential in terms of profit contribution. The focusing on the business is listed on page 31 in particular, including Skip Hop and Simple Joys, where we've made very good progress recently and have further profit improvement planned in 2020 and beyond.

And finally, we are increasing our efforts around driving productivity and efficiency across the company. I think we've always done a good job in managing spending, but in this competitive market, more progress is required.

Page 30 and as Mike referenced, we have recently executed some fairly comprehensive organizational changes across the company. These activities include realizing opportunities in our retail operations, both in the U.S. and Canada and across our global supply chain functions. We're continuing to scope additional productivity opportunities to realize the $100 million of profit improvement, which Mike referenced. We'd anticipate that some portion of the opportunities we identify, will be reinvested to support future growth and strengthen the business. We expect that first quarter results will include an estimated charge of $10 million to $12 million related to these restructuring actions, which we expect will generate about $15 million in go forward annualized savings across the company.

On page 31, one of the stronger aspects of our business model, is our strong cash flow generation. Last year, we generated cash flow from operations of nearly $400 million and over $3 billion and since 2007. We've demonstrated our strong commitment to return excess capital to our shareholders, through our recurring dividend and through share repurchases. Our outlook indicates that the business will continue to generate strong cash, with nearly $2 billion in cumulative operating cash flow forecasted through 2024. Our first priority is to find ways to put capital back to work in our business. We also will continue to evaluate value accretive acquisitions to supplement our planned organic growth. Absent identification of other uses for this cash though, we intend to continue to distribute capital to our shareholders. Our Board recently approved a new incremental $500 million share repurchase authorization, to provide additional capacity to continue our share repurchase program. Additionally, the Board has approved a 20% increase to our recurring dividend to $0.60 per share, effective with the dividend to be paid next month. Since initiating our dividend in 2013, we've grown it at a compound annual growth rate of over 20%.

Moving now to page 33 and our outlook for 2020; our guidance this morning does not include any adjustments for potential effects of the coronavirus situation. For the full year, we're targeting sales growth in the 2% to 3% range, and growth and adjusted earnings per share of 4% to 6%. We expect growth in sales and earnings will be stronger in the second half of the year. 2020 should be another good year of cash generation as well, before casting operating cash flow between $375 million and $400 million.

For the first quarter, we are forecasting net sales will be comparable to last year and adjusted earnings per share of approximately $0.60 per share. We're expecting growth in U.S. retail and international and are planning U.S. wholesale sales down somewhat in the first quarter, in part due to changes year-over-year and the timing of orders and changes in customer mix.

Royalty income is expected to be down in the first quarter, for the same reasons id declined in the fourth quarter of 2019. SG&A will also weigh on profitability in the first quarter, with higher spending on technology, new stores and marketing. Finally, for stronger growth in sales and earnings in the second quarter, as Mike mentioned, we will likely face some disruption in our supply chain due to the coronavirus situation, especially as it relates to potential delays in delivery of fall product beginning in the second quarter. This is a very fluid situation, and we're still receiving information from our supply chain teams in Asia and from our vendors. We're providing today our best view of our outlook based on what we know today. Hopefully we'll have additional information to share with you on our first quarter update in late April.

And with these remarks, we're ready to take some questions.

Questions and Answers:

Operator

[Operator Instructions]. Our first question today will come from Paul Lejuez with Citi.

Paul Lejuez -- Citigroup -- Analyst

Thanks guys. During the quarter, retail was a little bit stronger than wholesale, and within wholesale you had lower sales to off-price. So just trying to understand the gross margin pressure a little bit more, a couple of those things -- both of those things are, in theory, tailwinds to gross margin. So maybe just a little bit more detail on what were the inventory related costs that hurt gross margin in the fourth quarter, how much was tariffs impacting you, and just maybe quantify, how we should think about that line item in the future quarters. Thanks.

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

Sure. So, Paul, I'd say overall for gross margin, it was a little bit below our expectations for the company in total. We did take some additional inventory provisions in our retail business. Some of that related to a higher strength provision, based on our physical inventory observation. In the last few years, we've introduced some additional operational complexity to our stores. We think that was -- what was underneath that, that's obviously a real cost to the business. We did make progress in terms of realized pricing in the fourth quarter, just not quite to the same level that we had initially planned.

Within wholesale, there's lots of different dynamics that set aside gross margin. Certainly we had some changes in customer mix. I'd say, some lower sales to some of our traditionally higher margin customers in in the quarter. We had some bad debt expense that we took, that's sort of an SG&A pressure, and we did take some additional inventory provisions related to some fabric liability in the wholesale side of the business.

So I'd say the outlook for gross margin in 2020 is good. We're planning expansion in gross margin. I'd say near term in the first quarter, we're planning more comparable gross margins, but we are expecting expansion for the balance of the year, and that's based on, as Mike said, we negotiated a favorable product cost for 2020, and we are seeing continued progress in our pricing initiatives.

Michael D. Casey -- Chairman and Chief Executive Officer

And Paul, you asked about the tariffs, so we had -- tariff impact last year was about $4 million, $1 million of which happened in the fourth quarter. Our best estimates now, the tariffs for 2020 will be around $14 million, about $4 million in each of the first two quarters, and about $3.5 million in the third and fourth quarters.

Paul Lejuez -- Citigroup -- Analyst

Thanks. And just a follow-up, maybe I think you mentioned the overall children's market declined 6% at age zero to 10. Can you talk about what happened on a unit basis. Also, if we can maybe talk a little bit about the Age Up initiative, where you're seeing the greatest success, may be the size of that business for you and growth in that segment of the kids market? Thanks.

Michael D. Casey -- Chairman and Chief Executive Officer

I'd say on the -- in terms of the market, I would say it was a combination of just fewer children in that age range, and I would say some portion of about 4% or 5% of it was on price. And as we look at the market data, the total market was down around 6%, the baby apparel market was down more than that. I would say that's inconsistent with the experience we have. But that's -- the market data is the best information we have. I still say that the market data reflects a little bit of a disruption from Toys"R"Us and Babies"R"Us going out of business. Those were that big baby apparel retailers, and then with Gymboree going out of business. I think that either you have a lot of pantry loading where people loaded up and had carts full of things that held them over for more than just the immediate near-term outfitting needs. So our hope is that we see the dust settle a bit on that market data and the market stabilizes a bit more in 2020. Second part of your question, Paul, was what?

Paul Lejuez -- Citigroup -- Analyst

The age up.

Michael D. Casey -- Chairman and Chief Executive Officer

In terms of the age up, we feel good about that strategy, Paul. It's really a way for us to increase the lifetime value of the customers that we acquire, one that when the moms and dads have a baby and we look for that to be a good growth opportunity for our company. I think we mentioned that we'd added several sizes in Carter's and one additional size in Oshkosh that accounted for about $100 million of new sales in 2019. You asked about success where we have in retail. Our largest growth in 2019 was from the strategy our kids sizes for age 5 to 10-year-old children, that was up high single digits in our retail business last year, so good growth there. And then in wholesale, the age up strategy is more of a toddler strategy. We're up about 10% in sales in our toddler sizes for the wholesale business last year. We implemented a plan to help them capture some of that because we are the market leader in toddler. We added toddler in Amazon a year and a half ago. We added toddler sizes with our Child of Mine brand in Walmart last fall and we're expanding toward the spring. And then just this spring we've added toddler with our Just One You brand in Target, including new swim category. So 2020 will be the first time that all exclusive brands will have toddler placement and we're excited about the growth opportunity as a lynchpin for the age up strategy.

Paul Lejuez -- Citigroup -- Analyst

Thanks, guys. Best of luck.

Michael D. Casey -- Chairman and Chief Executive Officer

Thanks very much.

Operator

And next, we'll move to David Buckley with Bank of America.

David Buckley -- Bank of America Merrill Lynch -- Analyst

Hi, guys. Good morning. Thanks for taking my question. So the 2% to 3% sales growth guidance for the year, how should we think about the contribution from retail and wholesale? And then wholesale specifically, how are you planning the first half sales? It sounds like there's a timing shift happening in 1Q.

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

We're planning wholesale shipments in the first quarter down, but then up again in second quarter and then low single-digit growth for the full year. I'd say we're also planning low single-digit growth in retail and mid single-digit growth in the international business for 2020.

David Buckley -- Bank of America Merrill Lynch -- Analyst

Okay. And then what gives you confidence in the sales and EPS acceleration after the first quarter?

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

I think the second half of the year as our business has changed and wholesale has become a little bit smaller piece of the pie, we're a bit more of a direct-to-consumer business than we've been historically. So more of that business is done in the second half of the year. That is the margin-rich part of the business. We think we will have some of the progress and fruits of our labor around pricing initiatives as well as inventory productivity. There's also a strong forward benefit to share repurchase that comes later in the year which helps that EPS metric.

David Buckley -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you very much.

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

Welcome.

Operator

And next, we'll hear from Ike Boruchow with Wells Fargo.

Ike Boruchow -- Wells Fargo -- Analyst

Hi. Good morning, everyone. Two questions. The first one maybe for Mike. On the supply chain, so I appreciate all the color and totally understand that your visibility is very limited right now. But I'm trying to understand if things were to worsen or just not improve the next time we hear from you, is the risk more on the side of there would be order cancellations and revenue risk and is it more that or is it more a function of your average unit cost and freight cost of shipping and maybe things that were on boats go on planes and it's more of a cost issue? I'm just kind of curious how to think about what the risks are when we think about that?

Michael D. Casey -- Chairman and Chief Executive Officer

I'd say it's the former. If the product comes late, especially in a tougher retail environment, there's always a risk that some of our wholesale customers will say, we no longer need the units. I think it's important for you to understand less than 15% of our units are being currently sourced from China. And every year for years there was always a question, what was the retention of the factory workers after the Chinese New Year's holiday? And everybody was expected back around the 10th of February and because of the travel restrictions people got back later. So we're anticipating right now that production will be delayed some portion of three weeks or more. And our suppliers are working through it. We're in close contact with all of our suppliers. And depending on the different locations, people are back and working and northern part of China people are still slowly getting back to work.

What's unknown today is what I'll say is the ripple effect. So a lot of our suppliers rely on their fabric suppliers. We don't source fabric. We source finished product. And a lot of the textile mills are spread throughout China, including northern China and those areas are more affected than textile mills in southern China. So what's unknown is whether or not they will be able to get the fabric from the suppliers they had planned to get it from or whether or not they have to go to other parts of the world, including India, to get the fabrics. That yet is unknown. The other thing is just we're anticipating that there will likely be some port congestions as everybody catches up and gets the product to the docks that there may be some congestion there. So we've got good people.

Thankfully unlike the cotton prices years ago, we've got 400 of our own people in Asia, Cambodia, Vietnam, Hong Kong working closely with our supplier. So we'll have very, very good visibility to how everybody is back up and running. We currently have over $600 million of inventory. We've got millions of units coming in every week from other parts of Asia. The things that we're doing to mitigate the risk we're bypassing China. A lot of times we'll consolidate product in China, but given the disruption in China we're having a lot of the product sent directly to the United States from Vietnam, Cambodia, Bangladesh and other parts of Asia. We're also evaluating the more time sensitive product categories, thankfully all of our Easter dressing is here in the United States. Easter dresses sell a lot better before Easter than after Easter. And we don't expect the shelves be bare anytime this year.

We've got plenty of inventory to keep us busy. As best we can tell, we might see some impact late second quarter, early third quarter on some of our early fall deliveries, so we'll keep an eye on that. We'll have better visibility for that in April. We're leveraging our teams based in Cambodia and Vietnam to supplement the good work we had done in Hong Kong so that our product development process for the holidays, the year-end holidays stays on schedule. So bottom line, I think it's reasonable to assume there's going to be some disruption in the flow of goods. It is just too early to quantify the impact of the delays and we'll share more with you in April.

Ike Boruchow

Got it. And then just a quick follow up for Richard. I guess real quickly, I'm sorry if I missed it, could you quantify the 53rd week for us? And then the more important question is, just when we talk about e-comm penetration over time and e-comm profitability, I think you mentioned in your multiyear plan you expect e-comm to go to low 40s from I think low 30s today. It's gone from low 20s to low 30s, but as you've done that the overall margin at retail I think is down about 100 basis points. And I know you've talked about e-comm being 20% plus margin over the years. Can you give us an update where we are today with profitability, because that mix in and of itself should drive margin expansion for retail and for gross margin, but I feel like we haven't been seeing that? So I'm just kind of curious what's been happening and then what the outlook is as that mix continues to go forward?

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

Sure. As it relates to your comments, we'll take that first. We have an extraordinarily profitable e-commerce business. The margins are north of 20%. They have come down in recent years with what we've seen in the marketplace around consumer expectations for free and fast shipping. That's provided a fair amount of pressure on that operating profit for e-commerce. Our models show that we will continue to be able to improve e-commerce profitability over time. We mentioned the initiative to deliver product from stores. We think that is a bit of an unlock as it relates to getting product particularly to consumers further away from our core distribution center here in Georgia. So I'm optimistic that there are opportunities for us to continue to improve the profitability of e-commerce. That team has done a good job in terms of reducing the amount of excess inventory.

Heir inventory buys have become more accurate over time. We continue to enjoy extraordinarily low return rate which helps the profitability of our business online relative to other retailers. I would say that the pressure that we've had in the retail segment over the last number of years has been more based in the stores and the fact that we have not been able to drive a consistent store count in the brick and mortar stores. There's a number of initiatives on that side of things as well. We have been improving I'd say the quality of that portfolio to some of the older less productive stores which have been a drag on the operating performance of the segment. Those are going to start to fall out of the base. So I'm optimistic on the outlook for margin in the retail segment and that's kind of a character of the complexion underneath. As it relates to the 53rd week, it's the week that we've pegged as the week after Christmas. The estimates for the top line are I'd say in a range of $25 million to $30 million. It's not a particularly profitable week as we have measured it or forecasted it, largely a clearance week in our retail channel. So it might represent a marginal amount of profitability, call it breakeven to $1 million or $2 million of operating income. That's kind of how we scoped it at this point.

Ike Boruchow -- Wells Fargo -- Analyst

Thanks, guys.

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

Welcome.

Operator

And we'll move on to Susan Anderson with B. Riley FBR.

Susan Anderson -- B. Riley FBR -- Analyst

Hi. Good morning. Nice job in 2019. I was wondering if you could talk a little bit more about pricing and product cost for 2020. It sounds like maybe you expect a little bit more pricing but then flattish product cost for 2020. And then also it sounds like maybe you're starting to close the gap on those lower margin channel for the exclusive brands. Maybe if you could talk a little bit about the progress you're seeing there and expectation for 2020?

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

Sure. As it relates to product cost, as Mike said, we did have favorable negotiations with our vendors. And for the 2020 assortments, our supply chain team did a great job in taking advantage of the marketplace situation and the growth that we bring to those vendors. So we have negotiated lower product cost for 2020. That mixes in based on the products that we're assorting into slightly higher product cost in terms of the assortment itself. But for like-to-like product, they are down I'd say in the low single-digit range. We are planning for more improvement in pricing, still modest though.

We're not talking 10% or 20% increases in pricing. We're talking similar low single-digit progress with the favorability in product cost that we're expecting kind of widens out that nice spread between pricing and product cost. We have bought inventory I would say more conservatively in 2020, particularly in the second half of the year. So I think that would remove some of the historical pressure that we sometimes have when we get backed up with inventory. So we followed some of those successful practices that we're seeing on the part of some of our wholesale customers where they're buying inventory more conservatively, looking to get better sell-through, better realized pricing. That's kind of how we're thinking about it.

Michael D. Casey -- Chairman and Chief Executive Officer

I think a key point on that, one of the key initiatives of this $100 million productivity is pricing. It's price realization. It's not taking prices up on the same product we sold last year, but it's improved price realization through better inventory management. And the high -- we sell nearly 500 million units a year. There's probably -- we probably source 1 billion, but with a lot of our multipacks, there's 500 million selling units, including multipacks. Nickels and dimes for us equate to $25 million to $50 million of improved profitability. So the focus is buying inventory more conservatively, reducing SKUs, focusing on fewer, better styles, co-branding all of our stores so the consumer has a great experience, convenient experience shopping for the two best brand names known in kids apparel. So that's our focus, improving price realization by a nickel or more -- nickels and dimes are $25 million to $50 million of improvement and profitability. That's a key initiative for us going forward. So less product in the clearance rack at the back of the store.

Susan Anderson -- B. Riley FBR -- Analyst

Great. That's helpful. And then also just kind of where you're at with improving the margin on some of those exclusive brands and kind of closing the gap with some of those other higher margin channels?

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

Yes, I'd say we've made very good progress in improving the margin structure of Simple Joys. That's the one that had lagged because it was a newer business for us. We've been in business, to Mike's comments, with Target and Walmart nearly 20 years, so those businesses have significantly more size and scale than Simple Joys does. But the Simple Joys team has done a terrific job in improving the profitability of Simple Joys exclusive brands in total are a very margin-rich business for us. We've been pleased with that.

Susan Anderson -- B. Riley FBR -- Analyst

Great. Thanks so much. Good luck this year.

Michael D. Casey -- Chairman and Chief Executive Officer

Thank you.

Operator

And next, we'll hear from John Morris with D.A. Davidson.

John Morris -- D.A. Davidson -- Analyst

Thanks. Good morning, everybody. Congratulations on a great year.

Michael D. Casey -- Chairman and Chief Executive Officer

Thank you, John.

John Morris -- D.A. Davidson -- Analyst

On Q1, a little bit more color about where you see SG&A coming in? It sounds like there's some -- these SG&A investments that you're talking about, maybe if you can give us a little bit more color on those and how you see SG&A coming in, wondering to what degree the pressure is there?

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

I'd say we have modest growth in SG&A that we're planning for the first quarter. And it does reflect some of the investments that we have been making in technology. Some of those new capabilities has now been put in service, so we now have some higher depreciation expense that's coming through. We are continuing to spend on our website and our mobile experience in that channel which we think is really important to tracking those consumers. We're spending on some of the new tools around inventory management and assortment management, the digital design tool that Mike referenced. We're spending on information security which is an important initiative obviously for every public company to invest in. And then I'd say there's a few things more timing related in terms of timing of spend for some marketing and store-based programs which is falling a bit more into Q1 than perhaps a little bit later in the year previously. But we do expect to see the benefits of our productivity initiatives over the course of 2019. That will have offset some of the flow through of the higher investment spending.

John Morris -- D.A. Davidson -- Analyst

And then a quick follow up. I think you had mentioned that you had fallen a little bit short -- I think we were talking about sort of gross margin in Q4 had fallen a little bit short in terms of your expectations of pricing capture in Q4. Any reasons behind that in particular, just kind of the slowdown that you talked about in retail or sort of a little bit more color there?

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

Well, I would say the business came late for us, so I think the Black Friday selling period was perhaps not as robust as we had thought. So the consumer continues to shop closer and closer to the holiday. That's what we experienced this year. So I would say in the U.S. retail business and in Canada, we perhaps got a bit more promotional than we had originally anticipated and that had an effect on the gross margin line as did some of the additional inventory provisions that I mentioned. We did make progress in realized pricing. It just was not to the extent that we had originally planned.

John Morris -- D.A. Davidson -- Analyst

Great. Thank you.

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

Welcome.

Operator

And that will conclude today's question-and-answer session. At this time, I would like to turn the call back over to Mr. Casey for any additional or closing remarks.

Michael D. Casey -- Chairman and Chief Executive Officer

Thanks very much. Thank you all for joining us on the call this morning. We look forward to updating you again on our progress in April. Goodbye.

Operator

[Operator Closing Remarks].

Duration: 62 minutes

Call participants:

Michael D. Casey -- Chairman and Chief Executive Officer

Richard F. Westenberger -- Executive Vice President and Chief Financial Officer

Paul Lejuez -- Citigroup -- Analyst

David Buckley -- Bank of America Merrill Lynch -- Analyst

Ike Boruchow -- Wells Fargo -- Analyst

Susan Anderson -- B. Riley FBR -- Analyst

John Morris -- D.A. Davidson -- Analyst

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