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Carter’s, Inc. Reports First Quarter Fiscal 2022 Results

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·15 min read
In this article:
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  • Net sales and earnings exceeded expectations

    • Net sales $781 million

    • Diluted EPS $1.66

  • Returned $105 million to shareholders through share repurchases and dividends

  • Company reaffirms full year fiscal 2022 outlook:

    • Net sales growth of 2% to 3%

    • Adjusted diluted EPS growth of 12% to 14%

ATLANTA, April 29, 2022--(BUSINESS WIRE)--Carter’s, Inc. (NYSE:CRI), the largest branded marketer in North America of apparel exclusively for babies and young children, today reported its first quarter fiscal 2022 results.

"Our first quarter sales and earnings exceeded our expectations," said Michael D. Casey, Chairman and Chief Executive Officer. "Inventory levels improved in the quarter and enabled us to support higher demand in our wholesale and international businesses. As expected, our retail sales were lower in the quarter and reflect the impact of store closures, timing of the Easter holiday, and non-recurring benefit realized last year from the unprecedented government stimulus which supported families with young children.

"We are encouraged by the improving trend in births in the United States which began last summer. We believe our leading position in the young children’s apparel market and unparalleled multi-channel business model will enable us to build on our strong performance last year and achieve our growth objectives for 2022."

Adjustments to Reported GAAP Results

In addition to the results presented in this earnings release in accordance with GAAP, the Company has provided adjusted, non-GAAP financial measurements, as presented below. The Company believes these non-GAAP financial measurements provide a meaningful comparison of the Company’s results and afford investors a view of what management considers to be the Company’s underlying performance. These measures are presented for informational purposes only. See "Reconciliation of Adjusted Results to GAAP" section of this release for additional disclosures and reconciliations regarding these non-GAAP financial measures. There were no adjustments to the Company’s Q1 fiscal 2022 results; adjustments which were made to the Company’s Q1 fiscal 2021 results are summarized in the table below.

Fiscal Quarter Ended

April 2, 2022

April 3, 2021

(In millions, except earnings per share)

Operating
Income

% Net
Sales

Net
Income

Diluted
EPS

Operating
Income

% Net
Sales

Net
Income

Diluted
EPS

As reported (GAAP)

$

102.6

13.1

%

$

67.9

$

1.66

$

127.5

16.2

%

$

86.2

$

1.96

COVID-19 expenses

2.1

1.6

0.04

Restructuring costs

0.5

0.4

0.01

Retail store operating leases and other long-lived asset impairments, net of gain

(1.5

)

(1.2

)

(0.03

)

As adjusted

$

102.6

13.1

%

$

67.9

$

1.66

$

128.5

16.3

%

$

87.0

$

1.98

Note: Results may not be additive due to rounding.

Consolidated Results

First Quarter of Fiscal 2022 compared to First Quarter of Fiscal 2021

Net sales decreased $6.1 million, or 0.8%, to $781.3 million, reflecting growth in the Company’s U.S. Wholesale and International segments, offset by lower sales in its U.S. Retail segment.

U.S. Wholesale and International net sales grew 8% and 11%, respectively. U.S. Retail net sales declined 10%, reflecting: 1) comparison to first quarter of 2021 which benefited from significant and unprecedented government stimulus payments made to consumers in response to the pandemic; 2) 113 fewer retail stores at the beginning of the quarter; and 3) a later Easter holiday. U.S. Retail comparable sales declined 7%.

Operating income decreased $24.9 million to $102.6 million, compared to $127.5 million in the first quarter of fiscal 2021. Operating margin decreased to 13.1%, compared to 16.2% in the prior year period. Adjusted operating income (a non-GAAP measure) decreased $25.9 million to $102.6 million, compared to $128.5 million in the first quarter of fiscal 2021. Adjusted operating margin was 13.1%, compared to 16.3% in the prior year period, largely due to higher ocean freight and transportation costs.

Net income decreased $18.3 million to $67.9 million, or $1.66 per diluted share, compared to $86.2 million, or $1.96 per diluted share, in the first quarter of fiscal 2021. Adjusted net income (a non-GAAP measure) decreased $19.1 million to $67.9 million, compared to $87.0 million in the first quarter of fiscal 2021. Adjusted earnings per diluted share (a non-GAAP measure) was $1.66, compared to $1.98 in the first quarter of fiscal 2021.

Net cash used in operations in the first quarter of fiscal 2022 was $163.8 million compared to net cash used in operations of $39.5 million in the prior-year period. The increase in net cash used in operating activities principally reflects earlier receipt of inventory to help mitigate pandemic-related transportation delays and disbursements for 2021 performance-based compensation.

See the "Business Segment Results" and "Reconciliation of Adjusted Results to GAAP" sections of this release for additional disclosures regarding business segment performance and non-GAAP measures.

Return of Capital Activity

In the first quarter of fiscal 2022, the Company returned to shareholders a total of $105.1 million through share repurchases and cash dividends as described below.

  • During the first quarter, the Company repurchased and retired 0.8 million shares of its common stock for $74.5 million at an average price of $93.94 per share. Fiscal year-to-date through April 28, 2022, the Company repurchased and retired 1.1 million shares for $104.5 million at an average price of $92.66 per share. As of April 28, 2022, the total remaining capacity under the Company’s previously-announced repurchase authorizations was approximately $945 million.

  • In the first quarter, the Company paid a cash dividend of $0.75 per common share totaling $30.6 million. Future payments of quarterly dividends will be at the discretion of the Company’s Board of Directors based on a number of factors, including the Company’s future financial performance and other considerations.

Debt Redemption / Refinancing Update

On April 4, 2022, the Company redeemed $500 million principal amount of its 5.500% senior notes using cash on hand. This debt redemption is estimated to result in a loss on extinguishment of debt of approximately $20 million in the second quarter of fiscal 2022. Our adjusted diluted earnings per share forecasts described below in "2022 Business Outlook" exclude this estimated charge. We continue to evaluate the opportunity to refinance our 5.625% senior notes in 2022, subject to market conditions, which may result in additional charges related to loss on extinguishment of debt.

2022 Business Outlook

For the second quarter of fiscal 2022, the Company projects:

  • Net sales of approximately $750 million to $775 million;

  • Adjusted operating income of approximately $95 million to $105 million, compared to $110.4 million in the second quarter of fiscal 2021; and

  • Adjusted diluted earnings per share of approximately $1.60 to $1.80 (which excludes an estimated loss on extinguishment of debt of $20 million), compared to $1.67 in the second quarter of fiscal 2021.

This outlook for the second quarter of fiscal 2022 reflects:

  • Continued improvement in supply chain performance;

  • Less challenging comparisons to 2021 stimulus;

  • Improved price realization;

  • Higher labor costs, marketing investments, and distribution and freight expenses;

  • Lower interest expense; and

  • Benefit of share repurchases.

For fiscal 2022, the Company is reaffirming its prior guidance and continues to project:

  • Net sales increase of approximately 2% to 3%, with growth in all segments;

  • Adjusted operating income increase of approximately 4% to 6%, compared to $500.8 million in fiscal 2021; and

  • Adjusted diluted earnings per share increase of approximately 12% to 14% (which excludes an estimated loss on extinguishment of debt of $20 million), compared to $7.87 in fiscal 2021.

This outlook for fiscal 2022 reflects:

  • An improving trend in births in the United States;

  • The strength of our merchandising and marketing initiatives;

  • Better mix of inventories;

  • Improved price realization;

  • Gradual improvement in supply chain performance;

  • SG&A leverage;

  • Lower interest expense; and

  • Benefit of share repurchases.

We have not reconciled forward-looking adjusted operating income or adjusted diluted earnings per share to their most directly comparable GAAP measures because we cannot predict with reasonable certainty the ultimate outcome of certain components of such reconciliations, including early extinguishment of debt that are not within our control including due to factors described above, or others that may arise, without unreasonable effort. For these reasons, we are unable to assess the probable significance of the unavailable information, which could materially impact the amount of future operating income or diluted EPS, the most directly comparable GAAP metrics to adjusted operating income and adjusted diluted earnings per share, respectively.

Conference Call

The Company will hold a conference call with investors to discuss first quarter fiscal 2022 results and its business outlook on April 29, 2022 at 8:30 a.m. Eastern Daylight Time. To participate in the call, please dial 213-217-9349. To listen to a live broadcast via the internet and view the accompanying presentation materials, please visit ir.carters.com and select links for "News & Events" followed by "Webcasts & Presentations." A replay of the call will be available shortly after the broadcast through May 29, 2022, at 855-859-2056 (U.S. / Canada) or +1 404-537-3406 (international), passcode 4698757. The replay will also be archived online on the "Webcasts & Presentations" page noted above.

About Carter’s, Inc.

Carter’s, Inc. is the largest branded marketer in North America of apparel exclusively for babies and young children. The Company owns the Carter’s and OshKosh B’gosh brands, two of the most recognized brands in the marketplace. These brands are sold in leading department stores, national chains, and specialty retailers domestically and internationally. They are also sold through nearly 1,000 Company-operated stores in the United States, Canada, and Mexico and online at www.carters.com, www.oshkosh.com, www.cartersoshkosh.ca, and www.carters.com.mx. The Company’s Child of Mine brand is available at Walmart, its Just One You brand is available at Target, and its Simple Joys brand is available on Amazon. The Company also owns Skip Hop, a global lifestyle brand for families with young children. Carter’s is headquartered in Atlanta, Georgia. Additional information may be found at www.carters.com.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws relating to our future performance, including statements with respect to the potential effects of the COVID-19 pandemic and the Company’s future outlook, earnings, liquidity, strategy, financings, and investments. Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or not materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. Certain of the risks and uncertainties that could cause actual results and performance to differ materially are described in the Company’s most recently filed Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission from time to time under the headings "Risk Factors." Included among those risks are those related to: the effects of the current coronavirus outbreak; financial difficulties for one or more of our major customers; an overall decrease in consumer spending; our products not being accepted in the marketplace; increased competition in the market place; diminished value of our brands; the failure to protect our intellectual property; the failure to comply with applicable quality standards or regulations; unseasonable or extreme weather conditions; pending and threatened lawsuits; a breach of our information technology systems and the loss of personal data; increased margin pressures, including increased cost of materials and labor; our foreign sourcing arrangements; disruptions in our supply chain; the management and expansion of our business domestically and internationally; the acquisition and integration of other brands and businesses; and changes in our tax obligations, including additional customs, duties or tariffs. 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.

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)

Fiscal Quarter Ended

April 2, 2022

April 3, 2021

Net sales

$

781,284

$

787,361

Cost of goods sold

426,193

401,731

Adverse purchase commitments (inventory and raw materials), net

49

(6,330

)

Gross profit

355,042

391,960

Royalty income, net

7,474

7,463

Selling, general, and administrative expenses

259,893

271,927

Operating income

102,623

127,496

Interest expense

15,132

15,348

Interest income

(338

)

(225

)

Other income, net

(512

)

(917

)

Income before income taxes

88,341

113,290

Income tax provision

20,408

27,094

Net income

$

67,933

$

86,196

Basic net income per common share

$

1.66

$

1.96

Diluted net income per common share

$

1.66

$

1.96

Dividend declared and paid per common share

$

0.75

$

CARTER’S, INC.

BUSINESS SEGMENT RESULTS

(dollars in thousands)

(unaudited)

Fiscal Quarter Ended

April 2, 2022

% of
Total Net
Sales

April 3, 2021

% of
Total Net
Sales

Net sales:

U.S. Retail

$

366,358

46.9

%

$

407,067

51.7

%

U.S. Wholesale

307,301

39.3

%

283,377

36.0

%

International

107,625

13.8

%

96,917

12.3

%

Consolidated net sales

$

781,284

100.0

%

$

787,361

100.0

%

Operating income:

% of
Segment
Net Sales

% of
Segment
Net Sales

U.S. Retail

$

49,994

13.6

%

$

76,521

18.8

%

U.S. Wholesale

60,506

19.7

%

70,058

24.7

%

International

10,388

9.7

%

9,734

10.0

%

Corporate expenses(*)

(18,265

)

n/a

(28,817

)

n/a

Consolidated operating income

$

102,623

13.1

%

$

127,496

16.2

%

(*)

Corporate expenses include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, office occupancy, information technology, certain legal fees, consulting fees, and audit fees.

Fiscal Quarter Ended April 3, 2021

(dollars in millions)

U.S. Retail

U.S. Wholesale

International

Incremental costs associated with COVID-19 pandemic

$

1.1

$

0.9

$

0.1

Retail store operating leases and other long-lived asset impairments, net of gain

(1.5

)

Total charges

$

(0.4

)

$

0.9

$

0.1

(*)

The first fiscal quarter ended April 3, 2021 also includes corporate charges related to organizational restructuring of $0.5 million.

CARTER’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)

April 2, 2022

January 1, 2022

April 3, 2021

ASSETS

Current assets:

Cash and cash equivalents

$

702,266

$

984,294

$

1,053,690

Accounts receivable, net of allowance for credit losses of $5,766, $7,281, and $6,695, respectively

265,694

231,354

240,212

Finished goods inventories, net of inventory reserves of $11,307, $14,378, and $15,581, respectively

679,729

647,742

560,683

Prepaid expenses and other current assets

64,389

50,131

63,290

Total current assets

1,712,078

1,913,521

1,917,875

Property, plant, and equipment, net of accumulated depreciation of $536,580, $528,926, and $557,608, respectively

197,515

216,004

248,799

Operating lease assets

469,354

487,748

559,391

Tradenames, net

307,581

307,643

307,830

Goodwill

212,518

212,023

212,271

Customer relationships, net

33,151

33,969

36,596

Other assets

29,084

30,889

27,711

Total assets

$

2,961,281

$

3,201,797

$

3,310,473

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

284,034

$

407,044

$

334,831

Current portion of long-term debt, net

495,743

Current operating lease liabilities

146,823

147,537

172,117

Other current liabilities

111,078

176,449

149,911

Total current liabilities

1,037,678

731,030

656,859

Long-term debt, net

496,104

991,370

989,980

Deferred income taxes

48,450

40,910

56,990

Long-term operating lease liabilities

419,493

441,861

517,875

Other long-term liabilities

44,266

46,440

59,160

Total liabilities

$

2,045,991

$

2,251,611

$

2,280,864

Commitments and contingencies

Stockholders' equity:

Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at April 2, 2022, January 1, 2022, and April 3, 2021

$

$

$

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 40,555,922, 41,148,870, and 43,947,659 shares issued and outstanding at April 2, 2022, January 1, 2022, and April 3, 2021, respectively

406

411

440

Additional paid-in capital

21,904

Accumulated other comprehensive loss

(26,115

)

(28,897

)

(31,534

)

Retained earnings

940,999

978,672

1,038,799

Total stockholders' equity

915,290

950,186

1,029,609

Total liabilities and stockholders' equity

$

2,961,281

$

3,201,797

$

3,310,473

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

Fiscal Quarter Ended

April 2, 2022

April 3, 2021

Cash flows from operating activities:

Net income

$

67,933

$

86,196

Adjustments to reconcile net income to net cash used in operating activities:

Depreciation of property, plant, and equipment

13,282

23,183

Amortization of intangible assets

932

932

(Recoveries of) provisions for excess and obsolete inventory, net

(3,109

)

1,364

Other asset impairments and loss (gain) on disposal of property, plant and equipment, net of recoveries

190

(25

)

Amortization of debt issuance costs

787

738

Stock-based compensation expense

5,859

6,931

Unrealized foreign currency exchange (gain) loss, net

(189

)

49

(Recoveries of) provisions for doubtful accounts receivable from customers

(1,513

)

766

Unrealized loss (gain) on investments

935

(179

)

Deferred income taxes

7,759

4,365

Effect of changes in operating assets and liabilities:

Accounts receivable

(32,484

)

(54,484

)

Finished goods inventories

(27,720

)

37,812

Prepaid expenses and other assets

(13,245

)