Carter’s, Inc. (NYSE:CRI) Q3 2023 Earnings Call Transcript October 27, 2023
Carter’s, Inc. beats earnings expectations. Reported EPS is $1.84, expectations were $1.49.
Operator: Welcome to Carter’s Third Quarter Fiscal 2023 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 Chief Operating Officer; and Sean McHugh, Vice President and Treasurer. After today’s prepared remarks, we will take questions as time allows. Carter’s issued its third quarter fiscal 2023 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, and the company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 materials and earnings release posted in the company’s website. On this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company’s earnings release and presentation materials.
Also, today’s call is being recorded. And now I would like to turn the call over to Mr. Casey.
A young boy happily shopping in a children’s apparel retail store.
Michael Casey: Thanks very much, Chris. Good morning, everyone. Thank you for joining us on the call. Before we walk you through the presentation on our website, I’d like to share some thoughts on our business with you. We achieved our third quarter sales and earnings objectives. For the fourth consecutive quarter, we saw a higher than planned demand in our U.S. Wholesale segment. That higher demand drove our best quarterly growth in earnings since 2021. In our U.S. Retail segment, its third quarter profit contribution was in line with our forecast on lower-than-planned sales unseasonably warm weather in September weighed on our retail sales in the United States and Canada. It was reported to be the warmest September on record.
The late arrival of cooler weather in Canada also drove lower sales in our International segment. In the third quarter, we saw better price realization and profit margins, which were driven by the strength of our product offerings, lower ocean freight rates and a better level in mix of inventories. We continue to make good progress rightsizing our inventory levels in the quarter. Inventories grew last year when inflation peaked at historic levels and consumer demand slowed. Our inventories at the end of the third quarter were down over 30% and expected to trend lower by year-end. Our progress with inventory reduction has improved our cash flow relative to last year by over $400 million through September. Given our stronger-than-planned cash flow, we have reduced our seasonal borrowings and related interest expense, and we believe we have ample capacity to fully fund our growth strategies and plan to continue returning excess capital to our shareholders.
Our forecast for the year reflects an improving trend in our second half sales and earnings relative to our first half performance. In the second half this year, we are comping up against a significant slowdown in consumer demand that began when inflation peaked in June of 2022. In response to that unexpected downturn in consumer demand, our Wholesale customers aggressively curtailed and canceled inventory commitments in the second half last year. Assuming success with our forecast in the balance of this year, our second half sales are planned down 4%. By comparison, our sales for the year are planned down 8%. Our earnings per share are planned up 15% in the second half this year and planned down 11% for the year. In our remarks this morning, we will reference our second half assumptions, which we believe will be helpful to understand the improving trend in our performance.
Our third quarter got off to a good start. Our consolidated sales in July were comparable to last year. Nearly 80% of our apparel sales in the third quarter were in our baby and toddler product offerings. Those age ranges have the best quarterly performance this year with sales down only 2%. We continue to see a good response to our new Little Planet brand. It’s our most elevated premium priced product offering. We’re forecasting sales of our new Little Planet brand to be about $70 million this year, up over 50% to last year. We expect that growth will be driven by the strength of the product offering and expanded distribution of our wholesale customers, including Target, Amazon and Macy’s and through our own retail stores in the United States, Canada and Mexico.
In our U.S. Retail segment, our comparable sales were down 10% in the third quarter. We had forecasted a high single-digit decrease in sales. Our retail sales were trending on our plan through the first nine weeks of the quarter, down about 7% to last year. But when temperatures rose to record levels in September, demand for our cooler weather apparel slowed. In the third quarter, we saw better performance in our stores than online, our comparable U.S. retail store sales were down about 5% in the third quarter. By comparison, our e-commerce sales were down about 19%, largely due to lower traffic. That decrease is in line with third-party credit card data that tracks the online purchases of apparel. Given the financial strain on families with young children, we believe more consumers are cautious on spending, buying what’s needed and only when it’s needed.
Store visits are more intentional and fulfill the need for immediacy. We have a very high conversion rate in our stores than they are coming to buy, not browse. By comparison, e-commerce purchases are more impulsive, often triggered by our marketing texts and e-mails impulse purchases may be more constrained these days given higher credit card balances. Carter’s outperforms the young children’s apparel market in e-commerce penetration to total retail sales. In the United States, 28% of kids apparel is purchased online. Carter’s penetration is a few points higher than the market. E-commerce continues to be one of our highest margin businesses. Our return rate is one of the best in online retailing, less than 5%, which contributes to our high margin performance.
Given the high mix of children’s apparel Bolton stores, we plan to continue opening stores in the years ahead. Carter’s is a highly desirable tenant in shopping centers. Our brands attract families with young children to those centers. We expect to open nearly 50 stores in the United States this year and will close about a dozen low-margin stores. Our stores opened in recent years are achieving over 20% EBITDA margins and their comparable sales performance this year has outperformed the balance of our stores. Including this year, we plan to open 250 stores in the United States by 2027. These store openings are expected to contribute over $250 million in sales growth, including the benefit of related e-commerce sales. We expect most of these store openings will be in open air centers to provide convenience for consumers, including curbside pickup.
That said, we’ve seen good success with our mall stores in recent years. We’ve been highly selective on mall store openings. We currently have 90 of our 800 U.S. stores in malls and see an opportunity to double that store count in the years ahead. Carter’s has grown over the years to be the largest and most profitable specialty retailer focused on young children’s apparel. Our stores are the number one source of new customer acquisition. We believe our stores provide the very best value and experience with our brands and providing very high return on investment. Our stores provide a convenient alternative to shopping and big box retailers and we believe our direct-to-consumer capabilities provide market insights that help us support our wholesale customers.
We’ve made significant investments in our direct-to-consumer capabilities in recent years, including the same-day fulfillment of online purchases and RFID technology, which increases our visibility and accuracy of inventories. We’ve invested in marketing personalization capabilities, a highly rated mobile app and loyalty and credit card programs, which increased the frequency of transactions in the lifetime value of our relationships with consumers. We’re forecasting an improving trend in our U.S. Retail segment in the second half this year. The planned improvement reflects a stronger product offering and a significant improvement in on-time deliveries. Recall that a year ago, we were shipping our fall and holiday product offerings about 70% on time due to U.S. port congestion.
This year, our second half shipments to our wholesale customers and our retail stores are closer to 100% on time. With a better mix, the end level of inventories, we are forecasting our U.S. retail sales down 6% in the second half and down 9% for the year. Our market analysis and third-party credit card data continue to indicate that families with young children have pulled back on spending due to inflation. Carter’s advantages in inflationary markets include our focus on essential core products, a high mix of less discretionary baby apparel purchases, our broad and unparalleled market distribution, including our exclusive brands sold through Target, Walmart and Amazon and our compelling value proposition with average retail price points of about $11, including many high-value multipacks.
The average transaction in our store is about $50. That’s less than a tank of gas these days. Children’s apparel is a relatively small component of a young family’s budget but even less discretionary purchases like children’s apparel have been scaled back because of inflation. Our daily market analysis continues to show that our brands are competitively priced. Consumers expect to pay a reasonable premium for national brands and Carter’s is the best-selling national brand in young children’s apparel. In our experience, as long as our brands are priced within $1 or $2 of our private label brands, we are competitive. It’s a time-tested pricing strategy, which we plan to continue in the years ahead. Carter’s has built unparalleled relationships, including exclusive brands for the largest retailers of young children’s apparel in North America.
As the best-selling national brand in young children’s apparel, our brands complement their private label brands and drive traffic to their stores and websites. A high percentage of our wholesale product offerings are focused on baby apparel, and our baby apparel continues to be the best-performing component of our product offerings. A high percentage of our baby apparel is on automatic replenishment. So when the register rings across thousands of store locations, replenishment orders are automatically created and shipments are made to keep the fixtures filled and our essential core products in stock. Our exclusive brands sold to Target, Walmart and Amazon are forecasted to grow to 51% of our total wholesale sales this year, a couple of points higher than last year.
Increasingly, our wholesale sales are concentrated among fewer, larger and growing retailers. Our U.S. Wholesale sales in the third quarter reflect earlier-than-planned shipments of our fall and holiday product offerings we have adjusted our previous fourth quarter wholesale sales plan accordingly. We are forecasting an improving trend in our U.S. Wholesale segment this year with sales down less than 2% in the second half and down 7% for the year. We’re comping up against the wholesale destocking period in the second half last year. Given our wholesale customers progress managing their inventories, their sell-throughs, price realization and margins earned on our brands this year are generally better than last year. As a result, we have wholesale orders that support growth in our spring and summer 2024 product offering, a portion of which will begin shipping to the major retailers later this year.
We expect better visibility to wholesale demand for our fall and holiday 2024 product offerings when we complete that sell-in process early next year. For the year, our international sales are forecasted to be 15% of our total sales. We are also forecasting an improving trend in international sales with sales planned up 3% in the second half and down about 3% for the year. Our sales in Canada, Mexico and Brazil are expected to contribute about 85% of our international sales this year. The balance of our international sales are through wholesale relationships with about 40 retailers representing our brands in over 90 countries in through over 100 online platforms outside of North America. Some of our international wholesale customers have been adversely affected by inflation, the stronger dollar and global conflicts.
We’re assuming growth in Mexico and Brazil this year, which is expected to partially offset lower sales in Canada and other markets. Our supply chain continues to be a source of strength in our performance this year. On-time shipping performance has been excellent. Our supply chain team has negotiated meaningfully lower ocean freight rates, which are contributing to our second half earnings growth. Product costs are also expected to be lower in the second half of this year and next year. We expect those lower costs will enable us to strengthen our product offerings, sharpen price points and improve profitability next year. In summary, we achieved our third quarter sales and earnings objectives. My comments on the outlook for the year reflect the high end of our guidance this morning with the late arrival of cooler weather, the fourth quarter has gotten off to a slow start, we’ve seen a strong correlation between warmer weather and the demand for our fall and holiday product offerings, where weather is cooler, sales trends are better.
With colder weather on the way, we expect our sales and earnings trends will improve as we move through the final weeks of the year. With nine weeks to go, we have adjusted our guidance to reflect what we believe is possible this year. We believe inflation, generational high interest rates and the suspension of pandemic-related stimulus payments to childcare centers have weighed on families with young children this year. Thankfully, birth trends in the United States have stabilized. Birth this year are expected to be comparable to last year. And with a near 40-year high in weddings last year, continued strength in the labor markets and moderation in inflation, we believe market conditions will improve. Carter’s is the best-selling brand in young children’s apparel.
We believe our unparalleled market distribution capabilities and brand reputation for quality and value will enable Carter’s to continue leading the market and be well positioned to gain market share in the years ahead. I want to thank all of our employees for achieving stronger-than-planned performance in the third quarter and their commitment to help us achieve our growth objectives in the final weeks of this year. At this time, Richard will walk us through the presentation on our website.
Richard Westenberger: Thank you, Mike. Good morning, everyone. On Pages 2 and 3 of our presentation materials, we provided our GAAP income statements for the third quarter and year-to-date periods. Page 4, summarizes adjustments to our GAAP results for the third quarter and year-to-date periods for costs we incurred this year related to organizational restructuring. In the second quarter of last year, our strong liquidity enabled us to strengthen our balance sheet by early retiring pandemic-related debt. The loss associated with this early debt extinguishment is included as an adjustment to last year’s Q3 year-to-date GAAP results. This information is included for your reference and this morning, I will speak to our results on an adjusted basis, which excludes these items.
Moving to Page 5. As Mike said, we achieved the sales and earnings objectives which we shared with you back on our July call. Net sales in the quarter were $792 million, slightly above the high end of our guidance range. These consolidated sales results reflect higher than planned demand in our U.S. Wholesale business. Retail sales in the U.S. and Canada were lower than we had forecasted, we believe a result of warm weather that contributed to unfavorable traffic trends particularly in September. Profitability, both operating income and earnings per share exceeded our forecast. The drivers of our better-than-planned profitability were strong expense management and continued progress in reducing inventories, which has led to better cash flow, lower borrowings and lower interest expense.
Page 6 summarizes a few highlights of our third quarter performance relative to last year. Third quarter sales declined 3%. We had growth in our U.S. Wholesale business, which was offset by lower sales in our U.S. Retail and International businesses. Adjusted operating income grew 5%. Adjusted operating margin improved 100 basis points to 12.2% and driven by over 200 basis points of expansion in gross margin rate with average unit pricing up in the low single digits and average unit product costs down modestly. Adjusted EPS grew 10% in the third quarter above operating income growth due to the benefits of lower interest expense and our share repurchases. We were encouraged by our third quarter results. Recall that 2021 represented record profit performance for our company.
Our profitability began to be affected by the historic spike in inflation and its impact on consumer demand throughout the marketplace in the early part of 2022. So we were pleased to see growth and profitability this past quarter. Page 7 includes the same P&L metrics for the first three quarters of 2023 versus last year. Year-to-date net sales were down 9% and adjusted operating income and adjusted EPS were down 29% and 26%, respectively. Our year-to-date performance reflects the significant impact of various macro factors on consumer demand, particularly in the first half of the year, including inflation and higher interest rates. Turning to our third quarter P&L on Page 8. I’ve covered the drivers of net sales in the quarter. And on this nearly $800 million in net sales, we achieved a gross margin rate of 47.5%, an increase of 220 basis points over last year.
Lower ocean freight rates were the largest contributor to this year-over-year gross margin expansion. We also had lower inventory charges in this year’s third quarter. A year ago, we incurred significant inventory charges as demand slowed in our business, including in wholesale, as our customers aggressively reduced their inventory commitments in response to the slowdown in consumer demand in their businesses. In Q3, we also continued to modestly improve realized pricing. Spending was well managed again this quarter below what we had forecasted and comparable to last year, variable costs related to sales volume were down as were marketing expenses largely due to the timing of spend. Distribution and freight expenses declined, reflecting in part costs in the prior year to transition out of a high-cost distribution center in California we moved that distribution activity to our lower-cost distribution network here in Georgia.
Offsetting these spending declines were higher provisions for performance-based compensation and higher professional fees in the quarter. Adjusted operating income grew 5% to $96 million with solid expansion in our adjusted operating margin, as I mentioned. Below the line, net interest expense was lower than last year and better than we had forecasted. Our strong cash generation and liquidity enabled lower seasonal borrowings on our revolver compared to last year’s third quarter. Our effective tax rate in the third quarter was 22.5%, up 280 basis points over last year, reflecting a greater proportion of our earnings in the U.S. this year. Our weighted average share count declined by approximately 2 million shares or 5% versus last year, driven by our share repurchases.
So on the bottom line, adjusted diluted earnings per share were $1.84, up 10% compared to $1.67 last year. On Page 9, we’ve included our year-to-date adjusted P&L for your reference. As noted earlier, our third quarter performance represented an improvement in trend in our business. Our first half performance reflected the significant impact of the various macro factors we’ve mentioned. On Page 10, we’ve summarized some highlights of our balance sheet and cash flow. Our balance sheet is in excellent shape. Total liquidity was $945 million with cash on hand of approximately $170 million at quarter end and virtually all of the $850 million credit facility available to us. Q3 ending inventory was $621 million, down 31% year-over-year, which was better than we had forecasted.
The improvement versus last year reflects lower days of supply and increased productivity. In the third quarter, we made good progress selling through inventory, which we packed and held last year as consumers and wholesale customers pulled back on demand. Pack and hold inventory balances were $44 million at the end of Q3 compared to over $100 million at the end of last year’s third quarter. We expect we’ll work through substantially all of our remaining prior season pack and hold inventory by the end of this year. Total net inventories are also expected to be lower at the end of the year. Debt declined $170 million compared to the third quarter of last year, made possible by our significantly improved operating cash flow. We’ve continued to manage our cash and debt position subsequent to quarter end.
In October, we paid down the $70 million in seasonal revolver borrowings outstanding at the end of Q3 leaving $500 million in senior notes, which don’t mature until 2027 as our only outstanding debt. Year-to-date, operating cash flow was $206 million a significant improvement compared to a use of cash of over $200 million last year. This improvement reflects lower inventories and other favorable changes in working capital. Given our year-to-date progress and outlook for the fourth quarter, we’ve raised our full-year operating cash flow outlook from over $300 million to over $350 million. Year-to-date CapEx increased by $15 million to $42 million largely due to investments in new stores here in the U.S., in Canada and in Mexico. Lastly, on this page, year-to-date, we’ve returned significant capital to shareholders this year.
Over the last number of years, we’ve distributed virtually all of the free cash flow which the business has generated annually to our shareholders. Turning to Page 12 for a summary of the performance of our business segments in the third quarter. Q3 consolidated net sales declined $27 million versus last year. As we’ve covered growth in our U.S. wholesale business was offset by lower sales in U.S. retail and to a lesser extent, lower international sales. Overall profitability improved both in operating income and operating margin driven by our U.S. wholesale business. Corporate expenses increased by $9 million over last year reflecting higher consulting and professional fees focused on our sales and earnings initiatives. On Page 13, we’ve summarized the performance drivers for each of our business segments in the third quarter.
U.S. Retail sales declined 8% as macroeconomic factors, including inflation and meaningfully higher interest rates continued to adversely affect consumer traffic and demand. Comparable sales declined to 10%. We had previously forecasted a decline in the high single digits. As we said, we believe that warm weather in September likely affected consumer demand for fall product. Nearly all of U.S. Retail’s shortfall to its Q3 sales forecast occurred in the month of September. As has been the case all year, our stores were a stronger performing component of our U.S. retail business with a more significant comp decline in e-commerce. While traffic in our U.S. Retail business was lower versus last year, we achieved improved pricing and grew average transaction values.
U.S. Retail’s operating margin was 13%, down from just over 14% last year. This margin performance reflects expense deleverage on lower sales, higher product costs, partially offset by improved realized pricing and lower transportation costs. Segment operating profit was $49 million compared to $58 million last year and was consistent with our forecast, largely due to good management of spending in response to lower topline sales. In U.S. Wholesale, sales grew 4% driven by higher-than-planned demand for our seasonal products, nearly all of our brands contributed to growth in the quarter. In addition to higher demand for seasonal product, we’re seeing an improved trend in demand for products carried by many of our wholesale customers under automatic replenishment programs.
Several of our customers had suspended their replenishment programs last year as they worked to reduce inventory commitments in light of the impact of inflation on consumer demand. Order cancellations were lower than a year ago and part of a result of better on-time shipping performance. U.S. Wholesale operating margin was elevated in the third quarter at 22%, up significantly from 13.9% a year-ago. Wholesale profitability this year benefited from comparisons to some unusual costs incurred a year ago, including $7 million in costs to transition distribution activity from the West Coast and higher inventory charges last year. For the full-year, in 2023, we’re planning U.S. Wholesale adjusted operating margin will be in the high teens, which is more consistent with the run rate for profitability in this part of our business.
International net sales declined 4%, principally due to lower demand in our Canadian retail business, particularly for cold weather apparel, given the unseasonably warm temperatures in September. With the arrival of colder temperatures as we’ve moved through October, we’ve seen a meaningful improvement in traffic and comp sales in our Canadian business. Sales in the wholesale component of our international business were lower, largely a function of bookings planned for third quarter, which are now expected to ship in the fourth quarter. Sales in Mexico grew in Q3, driven by the retail component of the business. Mexico is a growth market for us. We’ve been making investments there in building out a great multichannel business model, including stores, e-commerce and wholesale.
International’s operating margin was 11.7% compared to 14% last year. The decline was largely driven by expense deleverage and higher product costs, which were offset in part by improved price realization and lower transportation costs. On Page 14, we’ve included our Q3 year-to-date adjusted segment results for your reference. Turning to Page 15. The summer, we introduced a new brand campaign for Carter’s with the tagline, “Love Every Moment” which reminds parents to savor each of the moments that come with raising small children. This campaign has been very well received by consumers with terrific early engagement. We recently launched a new series of emotional brand messages for the upcoming holiday season, all reinforcing the “Love Every Moment” theme.
These messages can be seen in all of our direct-to-consumer marketing channels and in our retail stores. Additionally, we make our great photography and creative available to our wholesale customers for their use in presenting the Carter’s brand in their own marketing programs. For millennial and Gen Z parents clothing, which is organic and sustainable has become increasingly important as they build out their children’s wardrobes. As shown on Page 16, our newest brand, Little Planet is focused on sustainable materials and fabrics. While customers love these attributes, they’ve embraced Little Planet, first and foremost, because it’s a beautiful product with a clean and elevated aesthetics. Little Planet is delivering good growth for us this year through its significantly expanded presence in our own stores and in the wholesale channel with a number of our leading customers.
Moving to Page 17, continuing our heritage of product innovation, we recently introduced a new brand in our baby assortment called Purely Soft. Purely Soft products are made from an all-season eco-friendly fabric that has a distinctive silky soft feel. The Purely Soft Baby and Sleep collection is currently available in 200 Carter’s stores and on our website. We’re planning to expand the distribution of Purely Soft to all of our Carter’s stores next spring with an expanded assortment of solids and prints. Additionally, this brand is available in all of our major wholesale customers, which carry our flagship Carter’s brand. Turning to Page 18. In addition to opening new stores, we’ve been working to improve the productivity and customer experience in our existing stores and 150 of our former side-by-side co-branded stores, we’ve created new distinct baby and toddler and kid experiences.
This new presentation has increased the focus and impact of these product categories, which address different age segments. Our results so far have been very positive. We’re testing additional product and brand presentations, which we hope will inform further improvements to new and existing stores. Moving to Page 19. With the next generation of parents now increasingly beginning their shopping research and information gathering on social media platforms, our branded content on TikTok and Instagram continues to resonate. We recently surpassed 200,000 followers and 1 million likes on TikTok and doubled our monthly Instagram engagement rate by providing content relevant to families with young children, ranging from educational clips, highlighting our product expertise to in-store shopping videos.
The next few pages feature some of our product and marketing plans for our exclusive brands at Target, Walmart and Amazon. Beginning on Page 20, Carter’s exclusive brand for Target Just One You recently launched its new holiday fashion assortment. Just One You marketing is featured across Target’s websites, social and search channels, and influencer network collectively supporting growing demand from target customers. Turning to Page 21 in Child of Mine Carter’s exclusive brand for Walmart. With the introduction of our new fashion styles and our enhanced in-store presentation, Child of Mine has significantly increased its brand awareness among new parents who are shopping at Walmart. Some recent Child of Mine brand enhancements include new baby and toddler holiday dress collections, perfect for special moments when families gathered together for the holidays.
These collections along with our best-selling layout styles are featured across Walmart’s digital and store marketing channels. Moving to Page 22. Our exclusive brand at Amazon Simple Joys has now kicked off the holiday shopping season on Amazon. Many brands have some level of presence on Amazon. Our Simple Choice assortment on Amazon is extensive and provides everything a parent needs for their little ones. Additionally, the vast majority of our Simple Joys products on Amazon have tens of thousands of consumer reviews with an average customer rating of 4.7 stars. Our Simple Joys brand store pages on Amazon have recently been refreshed providing Amazon’s customers with an improved shopping experience and access to our new holiday campaigns.
Turning now to our outlook for the balance of the year, beginning on Page 24. Today, we’re tightening the high end of the range of performance we believe is possible with two very important months left to go in the year. There are a number of factors which we believe will contribute to continued improved results in Q4, particularly in profitability. Importantly, we’re assuming consumer demand trends are better than we experienced in the third quarter, and we’re encouraged by the response to date to our fall and holiday event-related assortments, including family dressing and Christmas PJs. Our supply chain performance has improved meaningfully compared to last year, enabling much better on-time delivery performance for our wholesale customers.
We also have a better level and mix of inventories, particularly in our retail businesses. We expect fourth quarter earnings to benefit from the contributions from the new high-margin stores, which we’ve opened along with the closure of low-margin stores. We’re forecasting good expansion in gross margin driven by improved pricing and lower ocean freight rates. We’ve continued to plan our inventory commitments conservatively, which we believe will drive better sell-throughs and price realization. And lastly, we’re planning for a lower average share count given our progress with share repurchases. Moving to Page 25, and our specific thoughts on what we think is possible for the fourth quarter. Our outlook for fourth quarter sales has been adjusted in part due to the higher-than-planned wholesale demand for seasonal product, which we realized in the third quarter.
We’re planning net sales in the range of $862 million to $877 million. As I said, we’re planning for good gross margin expansion in Q4 with SG&A dollars planned down. Below the line, we’re forecasting a higher effective tax rate and lower shares outstanding. Adjusted operating income is planned in the range of $133 million to $143 million. And lastly, we’re forecasting adjusted EPS in the range of $2.50 to $2.72. Now turning to Page 26. As shown on this slide, if we’re successful with our fourth quarter plans, the resulting second half would represent meaningfully improved performance relative to the first half of the year. We’re expecting better second half sales trends in all of our business segments. And on second half profitability, we’re planning meaningful improvement relative to our results in the first half of the year and the second half of last year.
Second half adjusted operating income is expected to grow over last year in the range of 9% to 14% with an adjusted operating margin of roughly 14%. Given all this, our expectations for where our full-year results will end are summarized on Page 27. We are planning net sales in the range of $2.950 billion to $2.965 billion, a modest revision to the high end of our previous guidance for sales given the slowdown in demand we experienced in September and October. Adjusted operating income is expected in the range of $325 million to $335 million, again, down somewhat at the high end of the range from our prior forecast. Earnings per share are planned in the range of $5.95 to $6.15, which is consistent with our prior outlook. As noted earlier, operating cash flow is now expected to be over $350 million, an improvement over our previous view.
Through October, we’re generally running in line with our forecast, Wholesale a bit ahead and U.S. Retail a little behind. But important to note that the more significant volume weeks of the fourth quarter remain ahead of us. November and December combined represents about 70% of the sales and profitability we’re planning for the fourth quarter. The arrival of more consistent colder weather and closer proximity to the holidays have historically been catalysts in our business in the fourth quarter. All of our teams are focused on finishing 2023 in a very strong fashion. And with these remarks, we’re ready to take your questions.
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