Carter’s, Inc. Reports Second Quarter Fiscal 2023 Results
Net sales $600 million
Diluted EPS $0.64; adjusted diluted EPS $0.64
Returned $58 million to shareholders through share repurchases and dividends in Q2; $97 million returned in the first half of fiscal 2023
Full year fiscal 2023 outlook1:
Net sales of $2.95 billion to $3.00 billion
Adjusted operating income of $325 million to $340 million
Adjusted diluted EPS of $5.95 to $6.15
ATLANTA, July 28, 2023--(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 second quarter fiscal 2023 results.
"We achieved our second quarter sales and earnings objectives," said Michael D. Casey, Chairman and Chief Executive Officer. "For the third consecutive quarter, we saw higher than planned demand in our wholesale business driven, we believe, by the strength of our product offerings and leaner inventory positions.
"Our comparable retail sales in the second quarter were in line with our forecast. Unseasonably cool weather weighed on consumer demand in the earlier months of the quarter. We saw a meaningful improvement in the trend of our retail sales beginning Memorial Day weekend, which has continued into July.
"International sales were lower than forecasted due largely to cooler weather in Canada. Similar to our experience in the United States, the trend in our retail sales in Canada has also improved.
"We believe our performance relative to last year reflects the effects of inflation weighing on families with young children and adjustments they have made to constrain spending, where possible. Like our consumers, we have also reduced spending in many areas of our business to mitigate the effects of inflation. Most notably, we have meaningfully reduced inventory levels to improve our product sell-throughs, price realization, and gross profit margin.
"Given the continued efforts by the Federal Reserve to reduce inflation and slow consumer spending, we have risk-adjusted our second half sales and earnings forecasts. That said, we are forecasting a meaningfully improved trend in sales and earnings in the second half this year driven by, among other things, a stronger product offering, improved on-time shipping performance, and lower ocean freight rates and product costs.
"In the balance of the year, we plan to remain focused on margin preservation and cash flow. Given our collective efforts to strengthen our performance, we are forecasting a significant improvement in operating cash flow this year which we expect will enable Carter’s to continue investing in our growth strategies and returning excess capital to our shareholders through dividends and share repurchases.
"Carter’s is the market leader in young children’s apparel. We are the largest specialty retailer in North America focused on young children’s apparel.
"We are also the largest supplier of young children’s apparel to the largest, most successful retailers, including Target, Walmart, and Amazon. Together with our wholesale customers, we serve the needs of families with young children in over 20,000 points of distribution globally.
"We believe our unparalleled market distribution capabilities and brand reputation for quality and value will enable us to continue leading the market and be well-positioned to gain market share in the years ahead."
1 Refer to "Business Outlook" section of this release for additional information regarding reconciliations of forward-looking non-GAAP financial measures. |
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. Adjustments made to Q2 and first half of fiscal 2023 results reflect costs related to organizational restructuring. In Q2 of fiscal 2022, a pre-tax adjustment of approximately $19.9 million ($15.2 million net of tax, or $0.38 per diluted share) was made related to a loss on extinguishment of debt.
Second Fiscal Quarter | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
(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) | $ | 37.6 | 6.3 | % | $ | 23.9 | $ | 0.64 | $ | 75.4 | 10.8 | % | $ | 37.0 | $ | 0.93 | ||||||||
Organizational restructuring | 0.4 | 0.3 | 0.01 | — | — | — | ||||||||||||||||||
Loss on extinguishment of debt | — | — | — | — | 15.2 | 0.38 | ||||||||||||||||||
As adjusted | $ | 37.9 | 6.3 | % | $ | 24.2 | $ | 0.64 | $ | 75.4 | 10.8 | % | $ | 52.1 | $ | 1.30 | ||||||||
First Half | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
(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) | $ | 93.9 | 7.2 | % | $ | 59.9 | $ | 1.59 | $ | 178.0 | 12.0 | % | $ | 104.9 | $ | 2.59 | ||||||||
Organizational restructuring | 1.5 | 1.2 | 0.03 | — | — | — | ||||||||||||||||||
Loss on extinguishment of debt | — | — | — | — | 15.2 | 0.37 | ||||||||||||||||||
As adjusted | $ | 95.5 | 7.4 | % | $ | 61.0 | $ | 1.62 | $ | 178.0 | 12.0 | % | $ | 120.1 | $ | 2.97 | ||||||||
Note: Results may not be additive due to rounding.
Consolidated Results
Second Quarter of Fiscal 2023 compared to Second Quarter of Fiscal 2022
Net sales decreased $100.5 million, or 14.3%, to $600.2 million, compared to $700.7 million in the second quarter of fiscal 2022. Macroeconomic factors, including inflation, higher interest rates, higher consumer debt levels, and risk of recession, negatively affected demand from consumers and wholesale customers. U.S. Retail, U.S. Wholesale, and International segment net sales declined 15%, 17%, and 8%, respectively. U.S. Retail comparable net sales declined 15.9%. Changes in foreign currency exchange rates in the second quarter of fiscal 2023, as compared to the second quarter of fiscal 2022, had an unfavorable effect on consolidated net sales of approximately $1.2 million, or 0.2%.
Operating income decreased $37.9 million, or 50.2% to $37.6 million, compared to $75.4 million in the second quarter of fiscal 2022. Operating margin decreased to 6.3%, compared to 10.8% in the prior-year period, reflecting fixed cost deleverage on lower sales and higher performance-based compensation provisions, partially offset by lower inventory provisions and lower ocean freight rates.
Adjusted operating income (a non-GAAP measure) decreased $37.5 million, or 49.7% to $37.9 million, compared to $75.4 million in the second quarter of fiscal 2022. Adjusted operating margin declined to 6.3%, compared to 10.8% in the prior year period, principally due to the factors noted above.
Net income was $23.9 million, or $0.64 per diluted share, compared to $37.0 million, or $0.93 per diluted share, in the second quarter of fiscal 2022.
Adjusted net income (a non-GAAP measure) was $24.2 million, compared to $52.1 million in the second quarter of fiscal 2022. Adjusted earnings per diluted share (a non-GAAP measure) was $0.64, compared to $1.30 in the prior-year quarter.
First Half of Fiscal 2023 compared to First Half of Fiscal 2022
Net sales decreased $185.9 million, or 12.5%, to $1.30 billion, compared to $1.48 billion in the first half of 2022. Macroeconomic factors, as noted in the discussion of second quarter results above, negatively affected demand from consumers and wholesale customers. U.S. Retail, U.S. Wholesale, and International net sales declined 13%, 12%, and 11%, respectively. U.S. Retail comparable net sales declined 14.4%. Changes in foreign currency exchange rates in the first half of fiscal 2023, as compared to the first half of fiscal 2022, had an unfavorable effect on consolidated net sales of approximately $3.3 million, or 0.2%.
Operating income decreased $84.1 million, or 47.3% to $93.9 million, compared to $178.0 million in the first half of fiscal 2022. Operating margin declined to 7.2%, compared to 12.0% in the prior year period, reflecting fixed cost deleverage on lower sales, partially offset by lower inventory provisions, lower air freight costs, and lower ocean freight rates.
Adjusted operating income (a non-GAAP measure) decreased $82.6 million, or 46.4% to $95.5 million, compared to $178.0 million in the first half of fiscal 2022. Adjusted operating margin declined to 7.4%, compared to 12.0% in the prior year period, principally due to the factors noted above.
Net income was $59.9 million, or $1.59 per diluted share, compared to $104.9 million, or $2.59 per diluted share, in the first half of fiscal 2022.
Adjusted net income (a non-GAAP measure) was $61.0 million, compared to $120.1 million in the first half of fiscal 2022. Adjusted earnings per diluted share (a non-GAAP measure) was $1.62, compared to adjusted earnings per diluted share of $2.97 in the first half of fiscal 2022.
Net cash provided by operations in the first half of fiscal 2023 was $209.2 million, compared to net cash used in operations of $93.6 million in the first half of fiscal 2022. The improved operating cash flow principally reflects favorable changes in working capital, primarily lower inventories, partially offset by decreased net income.
See the "Business Segment Results" and "Reconciliation of GAAP to Adjusted Results" sections of this release for additional disclosures regarding business segment performance and non-GAAP measures.
Liquidity and Financial Position
The Company’s total liquidity at the end of the second quarter of fiscal 2023 was $1.0 billion, comprised of cash and cash equivalents of $175 million and $846 million in unused borrowing capacity on the Company’s $850 million secured revolving credit facility.
Return of Capital
In the second quarter and first half of fiscal 2023, the Company returned to shareholders a total of $58.5 million and $96.6 million, respectively, through share repurchases and cash dividends as described below.
Share repurchases: During the second quarter of fiscal 2023, the Company repurchased and retired 0.4 million shares of its common stock for $30.3 million at an average price of $67.49 per share. In the first half of fiscal 2023, the Company repurchased and retired 0.6 million shares of its common stock for $39.9 million at an average price of $68.20 per share. Fiscal year-to-date through July 27, 2023, the Company has repurchased and retired 0.7 million shares for $48.9 million at an average price of $69.08 per share. All shares were repurchased in open market transactions pursuant to applicable regulations for such transactions. As of July 27, 2023, the total remaining capacity under the Company’s previously announced repurchase authorizations was approximately $701 million.
Dividends: In the second quarter of fiscal 2023, the Company paid a cash dividend of $0.75 per common share totaling $28.2 million. In the first half of fiscal 2023, the Company paid cash dividends totaling $56.6 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.
2023 Business Outlook
We do not reconcile 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 that are not within our control due to factors described below, 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.
For the third quarter of fiscal 2023, the Company expects approximately:
$770 million to $790 million in net sales (compared to $819 million in Q3 fiscal 2022);
$80 million to $85 million in adjusted operating income (compared to $92 million in Q3 fiscal 2022); and
$1.45 to $1.55 in adjusted diluted earnings per share (compared to $1.67 in Q3 fiscal 2022).
Our forecast for the third quarter of fiscal 2023 assumes:
Continued macroeconomic pressure on consumer demand and cautious inventory commitments by wholesale customers;
Improved gross margin, reflecting improved price realization and lower transportation and inventory-related costs;
SG&A rate deleverage on lower sales;
Comparable interest expense and a higher effective tax rate; and
Lower average number of shares outstanding.
For fiscal year 2023, the Company expects approximately:
$2.95 billion to $3.00 billion in net sales (compared to $3.21 billion in fiscal 2022);
$325 million to $340 million in adjusted operating income (compared to $388 million in fiscal 2022);
$5.95 to $6.15 in adjusted diluted earnings per share (compared to $6.90 in fiscal 2022);
Operating cash flow of over $300 million (compared to $88 million in fiscal 2022); and
Capital expenditures of approximately $75 million (compared to $40 million in fiscal 2022).
Our forecast for fiscal year 2023 assumes:
In the second half, improved demand trend as inflation moderates;
Gross margin expansion, driven by improved price realization and lower transportation and inventory-related costs;
Comparable SG&A dollars;
Lower interest expense and higher effective tax rate; and
Continued return of excess capital.
Unless otherwise noted, the forecast assumptions for the third quarter of fiscal 2023 and fiscal year 2023 are relative to the prior-year period.
Our adjusted operating income and diluted earnings per share forecasts for fiscal year 2023 exclude pre-tax net charges of $1.5 million related to organizational restructuring, which were recorded in the first half of the year.
Conference Call
The Company will hold a conference call with investors to discuss second quarter fiscal 2023 results and its business outlook on July 28, 2023 at 8:30 a.m. Eastern Daylight Time. To listen to a live webcast and view the accompanying presentation materials, please visit ir.carters.com and select links for "News & Events" followed by "Webcasts & Presentations."
To access the call by phone, please preregister via the following link to receive your dial-in number and unique passcode: https://register.vevent.com/register/BI611c61f01abb4a47bd5214857d4a008c
A webcast replay will be available shortly after the conclusion of the call at ir.carters.com.
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 through 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. They are also sold in leading department stores, national chains, and specialty retailers domestically and internationally. 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 Little Planet, a brand focused on organic fabrics and sustainable materials, and 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
Statements contained in this press release that are not historical fact and use predictive words such as "estimates", "outlook", "guidance", "expect", "believe", "intend", "designed", "target", "plans", "may", "will", "are confident" and similar words are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements and related assumptions involve risks and uncertainties that could cause actual results and outcomes to differ materially from any forward-looking statements or views expressed in this press release. These risks and uncertainties include, but are not limited to, the factors disclosed in Part I, Item 1A. "Risk Factors" of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and otherwise in our reports and filings with the Securities and Exchange Commission, as well as the following factors: the continuing effects of the novel coronavirus (COVID-19) pandemic; macroeconomic factors, including inflationary pressures; the impact of supply chain delays; financial difficulties for one or more of our major customers; an overall decrease in consumer spending, including, but not limited to, decreases in birth rates; 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 and our inability to successfully increase prices to offset these increased costs; our foreign sourcing arrangements; disruptions in our supply chain, including increased transportation and freight costs; the management and expansion of our business domestically and internationally; the acquisition and integration of other brands and businesses; changes in our tax obligations, including additional customs, duties or tariffs; our ability to achieve our forecasted financial results for the fiscal year; our continued ability to declare and pay a dividend and conduct share repurchases in future periods; our planned opening and closing of stores during the fiscal year; and other risks detailed in the Company’s periodic reports as filed in accordance with the Securities Exchange Act of 1934, as amended. 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 | Two Fiscal Quarters Ended | ||||||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||
Net sales | $ | 600,199 | $ | 700,695 | $ | 1,296,079 | $ | 1,481,980 | |||||||
Cost of goods sold | 308,303 | 369,456 | 694,716 | 795,699 | |||||||||||
Gross profit | 291,896 | 331,239 | 601,363 | 686,281 | |||||||||||
Royalty income, net | 4,341 | 5,602 | 10,860 | 13,076 | |||||||||||
Selling, general, and administrative expenses | 258,676 | 261,423 | 518,308 | 521,315 | |||||||||||
Operating income | 37,561 | 75,418 | 93,915 | 178,042 | |||||||||||
Interest expense | 8,083 | 8,652 | 17,727 | 23,784 | |||||||||||
Interest income | (1,005 | ) | (272 | ) | (1,705 | ) | (610 | ) | |||||||
Other (income) expense, net | (767 | ) | 17 | (1,025 | ) | (494 | ) | ||||||||
Loss on extinguishment of debt | — | 19,940 | — | 19,940 | |||||||||||
Income before income taxes | 31,250 | 47,081 | 78,918 | 135,422 | |||||||||||
Income tax provision | 7,383 | 10,111 | 19,055 | 30,519 | |||||||||||
Net income | $ | 23,867 | $ | 36,970 | $ | 59,863 | $ | 104,903 | |||||||
Basic net income per common share | $ | 0.64 | $ | 0.93 | $ | 1.59 | $ | 2.60 | |||||||
Diluted net income per common share | $ | 0.64 | $ | 0.93 | $ | 1.59 | $ | 2.59 | |||||||
Dividend declared and paid per common share | $ | 0.75 | $ | 0.75 | $ | 1.50 | $ | 1.50 | |||||||
CARTER’S, INC. BUSINESS SEGMENT RESULTS (dollars in thousands) (unaudited) | ||||||||||||||||||||||||||||
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||||||||||||||
July 1, 2023 | % of Total Net Sales | July 2, 2022 | % of Total Net Sales | July 1, 2023 | % of Total Net Sales | July 2, 2022 | % of Total Net Sales | |||||||||||||||||||||
Net sales: | ||||||||||||||||||||||||||||
U.S. Retail | $ | 323,466 | 53.9 | % | $ | 379,097 | 54.1 | % | $ | 647,187 | 49.9 | % | $ | 745,455 | 50.3 | % | ||||||||||||
U.S. Wholesale | 186,867 | 31.1 | % | 224,016 | 32.0 | % | 466,856 | 36.0 | % | 531,317 | 35.9 | % | ||||||||||||||||
International | 89,866 | 15.0 | % | 97,582 | 13.9 | % | 182,036 | 14.1 | % | 205,208 | 13.8 | % | ||||||||||||||||
Consolidated net sales | $ | 600,199 | 100.0 | % | $ | 700,695 | 100.0 | % | $ | 1,296,079 | 100.0 | % | $ | 1,481,980 | 100.0 | % | ||||||||||||
Operating income: | % of Segment Net Sales | % of Segment Net Sales | % of Segment Net Sales | % of Segment Net Sales | ||||||||||||||||||||||||
U.S. Retail | $ | 28,211 | 8.7 | % | $ | 55,540 | 14.7 | % | $ | 55,150 | 8.5 | % | $ | 105,534 | 14.2 | % | ||||||||||||
U.S. Wholesale | 29,209 | 15.6 | % | 33,593 | 15.0 | % | 81,301 | 17.4 | % | 94,099 | 17.7 | % | ||||||||||||||||
International | 6,690 | 7.4 | % | 12,163 | 12.5 | % | 9,814 | 5.4 | % | 22,551 | 11.0 | % | ||||||||||||||||
Corporate expenses (*) | (26,549 | ) | n/a | (25,878 | ) | n/a | (52,350 | ) | n/a | (44,142 | ) | n/a | ||||||||||||||||
Consolidated operating income | $ | 37,561 | 6.3 | % | $ | 75,418 | 10.8 | % | $ | 93,915 | 7.2 | % | $ | 178,042 | 12.0 | % | ||||||||||||
(*) | 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. |
(dollars in millions) | Fiscal Quarter Ended July 1, 2023 | Two Fiscal Quarters Ended July 1, 2023 | ||||||||||||||||||
Charges: | U.S. Retail | U.S. Wholesale | International | U.S. Retail | U.S. Wholesale | International | ||||||||||||||
Organizational restructuring(*) | $ | 0.2 | $ | 0.1 | $ | — | $ | (0.6 | ) | $ | (0.4 | ) | $ | — | ||||||
(*) | Relates to gains for organizational restructuring and related corporate office lease amendment actions. Additionally, the second fiscal quarter and first two fiscal quarters ended July 1, 2023 includes a corporate charge of $0.1 million and $2.5 million, respectively, related to organizational restructuring and related corporate office lease amendment actions. |
Note: Results may not be additive due to rounding.
CARTER’S, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) (unaudited) | |||||||||||
July 1, 2023 | December 31, 2022 | July 2, 2022 | |||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 174,503 | $ | 211,748 | $ | 231,339 | |||||
Accounts receivable, net of allowance for credit losses of $3,849, $7,189, and $5,758, respectively | 132,679 | 198,587 | 183,920 | ||||||||
Finished goods inventories, net of inventory reserves of $17,847, $19,268, and $18,057, respectively | 681,573 | 744,573 | 858,258 | ||||||||
Prepaid expenses and other current assets (*) | 56,616 | 33,812 | 68,245 | ||||||||
Total current assets | 1,045,371 | 1,188,720 | 1,341,762 | ||||||||
Property, plant, and equipment, net of accumulated depreciation of $592,310, $569,528, and $548,013, respectively | 178,100 | 189,822 | 186,778 | ||||||||
Operating lease assets | 499,689 | 492,335 | 449,350 | ||||||||
Tradenames, net | 298,274 | 298,393 | 307,518 | ||||||||
Goodwill | 210,517 | 209,333 | 211,247 | ||||||||
Customer relationships, net | 28,995 | 30,564 | 32,248 | ||||||||
Other assets | 27,525 | 30,548 | 31,747 | ||||||||
Total assets | $ | 2,288,471 | $ | 2,439,715 | $ | 2,560,650 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 281,333 | $ | 264,078 | $ | 408,006 | |||||
Current operating lease liabilities (*) | 137,473 | 142,432 | 129,744 | ||||||||
Other current liabilities | 98,730 | 122,439 | 96,102 | ||||||||
Total current liabilities | 517,536 | 528,949 | 633,852 | ||||||||
Long-term debt, net | 496,984 | 616,624 | 616,275 | ||||||||
Deferred income taxes | 45,436 | 41,235 | 45,730 | ||||||||
Long-term operating lease liabilities | 420,805 | 421,741 | 400,046 | ||||||||
Other long-term liabilities | 32,701 | 34,757 | 43,881 | ||||||||
Total liabilities | $ | 1,513,462 | $ | 1,643,306 | $ | 1,739,784 | |||||
Commitments and contingencies | |||||||||||
Stockholders' equity: | |||||||||||
Preferred stock; par value $0.01 per share; 100,000 shares authorized; none issued or outstanding | $ | — | $ | — | $ | — | |||||
Common stock, voting; par value $0.01 per share; 150,000,000 shares authorized; 37,354,464, 37,692,132, and 39,315,094 shares issued and outstanding, respectively | 374 | 377 | 393 | ||||||||
Additional paid-in capital | — | — | — | ||||||||
Accumulated other comprehensive loss | (24,963 | ) | (34,338 | ) | (32,203 | ) | |||||
Retained earnings | 799,598 | 830,370 | 852,676 | ||||||||
Total stockholders' equity | 775,009 | 796,409 | 820,866 | ||||||||
Total liabilities and stockholders' equity | $ | 2,288,471 | $ | 2,439,715 | $ | 2,560,650 | |||||
(*) | Prepaid expenses and other current assets and Current operating lease liabilities as of July 2, 2022 were revised to reflect the presentation for payments of rent before payment due date of $13.2 million. |
CARTER’S, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) | |||||||
Two Fiscal Quarters Ended | |||||||
July 1, 2023 | July 2, 2022 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 59,863 | $ | 104,903 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Depreciation of property, plant, and equipment | 30,655 | 29,838 | |||||
Amortization of intangible assets | 1,877 | 1,865 | |||||
(Recoveries of) provisions for excess and obsolete inventory, net | (1,581 | ) | 3,709 | ||||
Gain on partial termination of corporate lease | (4,366 | ) | — | ||||
Other asset impairments and loss on disposal of property, plant and equipment, net of recoveries | 2,751 | 246 | |||||
Amortization of debt issuance costs | 788 | 1,173 | |||||
Stock-based compensation expense | 10,984 | 12,218 | |||||
Unrealized foreign currency exchange gain, net | (429 | ) | (32 | ) | |||
Recoveries of doubtful accounts receivable from customers | (491 | ) | (1,520 | ) | |||
Unrealized (gain) loss on investments | (633 | ) | 1,867 | ||||
Loss on extinguishment of debt | — | 19,940 | |||||
Deferred income taxes expense | 4,274 | 4,762 | |||||
Other | — | 1,019 | |||||
Effect of changes in operating assets and liabilities: | |||||||
Accounts receivable | 67,425 | 48,973 | |||||
Finished goods inventories | 70,017 | (215,519 | ) | ||||
Prepaid expenses and other assets(*) | (21,643 | ) | (19,071 | ) | |||
Accounts payable and other liabilities(*) | (10,249 | ) | (87,966 | ) | |||
Net cash provided by (used in) operating activities | $ | 209,242 | $ | (93,595 | ) | ||
Cash flows from investing activities: | |||||||
Capital expenditures | $ | (26,356 | ) | $ | (16,313 | ) | |
Net cash used in investing activities | $ | (26,356 | ) | $ | (16,313 | ) | |
Cash flows from financing activities: | |||||||
Payment of senior notes due 2025 | $ | — | $ | (500,000 | ) | ||
Premiums paid to extinguish debt | — | (15,678 | ) | ||||
Payment of debt issuance costs | — | (2,420 | ) | ||||
Borrowings under secured revolving credit facility | — | 120,000 | |||||
Payments on secured revolving credit facility | (120,000 | ) | — | ||||
Repurchases of common stock | (39,922 | ) | (176,306 | ) | |||
Dividends paid | (56,641 | ) | (60,460 | ) | |||
Withholdings from vesting of restricted stock | (4,837 | ) | (6,681 | ) | |||
Proceeds from exercises of stock options | 83 | 311 | |||||
Other | — | (321 | ) | ||||
Net cash used in financing activities | $ | (221,317 | ) | $ | (641,555 | ) | |
Net effect of exchange rate changes on cash and cash equivalents | 1,186 | (1,492 | ) | ||||
Net decrease in cash and cash equivalents | $ | (37,245 | ) | $ | (752,955 | ) | |
Cash and cash equivalents, beginning of period | 211,748 | 984,294 | |||||
Cash and cash equivalents, end of period | $ | 174,503 | $ | 231,339 | |||
(*) | Cash flows for the two fiscal quarters ended July 2, 2022 were revised to reflect the presentation for payments of rent before payment due date of $13.2 million. |
CARTER’S, INC. RECONCILIATION OF GAAP TO ADJUSTED RESULTS (dollars in millions, except earnings per share) (unaudited) | |||||||||||||||||||||||||||
Fiscal Quarter Ended July 1, 2023 | |||||||||||||||||||||||||||
Gross Profit | % Net Sales | SG&A | % Net Sales | Operating Income | % Net Sales | Income Taxes | Net Income | Diluted EPS | |||||||||||||||||||
As reported (GAAP) | $ | 291.9 | 48.6 | % | $ | 258.7 | 43.1 | % | $ | 37.6 | 6.3 | % | $ | 7.4 | $ | 23.9 | $ | 0.64 | |||||||||
Organizational restructuring (b) | — | (0.4 | ) | 0.4 | 0.1 | 0.3 | 0.01 | ||||||||||||||||||||
As adjusted (a) | $ | 291.9 | 48.6 | % | $ | 258.3 | 43.0 | % | $ | 37.9 | 6.3 | % | $ | 7.5 | $ | 24.2 | $ | 0.64 | |||||||||
Two Fiscal Quarters Ended July 1, 2023 | |||||||||||||||||||||||||||
Gross Profit | % Net Sales | SG&A | % Net Sales | Operating Income | % Net Sales | Income Taxes | Net Income | Diluted EPS | |||||||||||||||||||
As reported (GAAP) | $ | 601.4 | 46.4 | % | $ | 518.3 | 40.0 | % | $ | 93.9 | 7.2 | % | $ | 19.1 | $ | 59.9 | $ | 1.59 | |||||||||
Organizational restructuring (b) | — | (1.5 | ) | 1.5 | 0.4 | 1.2 | 0.03 | ||||||||||||||||||||
As adjusted (a) | $ | 601.4 | 46.4 | % | $ | 516.8 | 39.9 | % | $ | 95.5 | 7.4 | % | $ | 19.4 | $ | 61.0 | $ | 1.62 | |||||||||
Fiscal Quarter Ended July 2, 2022 | ||||||||||||||||||||||||||
Gross Profit | % Net Sales | SG&A | % Net Sales | Operating Income | % Net Sales | Income Taxes | Net Income | Diluted EPS | ||||||||||||||||||
As reported (GAAP) | $ | 331.2 | 47.3 | % | $ | 261.4 | 37.3 | % | $ | 75.4 | 10.8 | % | $ | 10.1 | $ | 37.0 | $ | 0.93 | ||||||||
Loss on extinguishment of debt (c) | — | — | — | 4.8 | 15.2 | 0.38 | ||||||||||||||||||||
As adjusted (a) | $ | 331.2 | 47.3 | % | $ | 261.4 | 37.3 | % | $ | 75.4 | 10.8 | % | $ | 14.9 | $ | 52.1 | $ | 1.30 | ||||||||
Two Fiscal Quarters Ended July 2, 2022 | ||||||||||||||||||||||||||
Gross Profit | % Net Sales | SG&A | % Net Sales | Operating Income | % Net Sales | Income Taxes | Net Income | Diluted EPS | ||||||||||||||||||
As reported (GAAP) | $ | 686.3 | 46.3 | % | $ | 521.3 | 35.2 | % | $ | 178.0 | 12.0 | % | $ | 30.5 | $ | 104.9 | $ | 2.59 | ||||||||
Loss on extinguishment of debt (c) | — | — | — | 4.8 | 15.2 | 0.37 | ||||||||||||||||||||
As adjusted (a) | $ | 686.3 | 46.3 | % | $ | 521.3 | 35.2 | % | $ | 178.0 | 12.0 | % | $ | 35.3 | $ | 120.1 | $ | 2.97 | ||||||||
Fiscal Year Ended December 31, 2022 | ||||||||||||||||||||||||||
Gross Profit | % Net Sales | SG&A | % Net Sales | Operating Income | % Net Sales | Income Taxes | Net Income | Diluted EPS | ||||||||||||||||||
As reported (GAAP) | $ | 1,472.4 | 45.8 | % | $ | 1,110.0 | 34.6 | % | $ | 379.2 | 11.8 | % | $ | 66.7 | $ | 250.0 | $ | 6.34 | ||||||||
Intangible asset impairment (d) | — | — | 9.0 | 2.1 | 6.9 | 0.17 | ||||||||||||||||||||
Loss on extinguishment of debt (c) | — | — | — | 4.8 | 15.2 | 0.38 | ||||||||||||||||||||
As adjusted (a) | $ | 1,472.4 | 45.8 | % | $ | 1,110.0 | 34.6 | % | $ | 388.2 | 12.1 | % | $ | 73.6 | $ | 272.0 | $ | 6.90 | ||||||||
(a) | In addition to the results provided in this earnings release in accordance with GAAP, the Company has provided adjusted, non-GAAP financial measurements that present gross profit, SG&A, operating income, income tax, net income, and net income on a diluted share basis excluding the adjustments discussed above. The Company believes these adjustments provide a meaningful comparison of the Company’s results and afford investors a view of what management considers to be the Company's core performance. The adjusted, non-GAAP financial measurements included in this earnings release should not be considered as an alternative to net income or as any other measurement of performance derived in accordance with GAAP. The adjusted, non-GAAP financial measurements are presented for informational purposes only and are not necessarily indicative of the Company’s future condition or results of operations. |
(b) | Net expenses related to organizational restructuring and related corporate office lease amendment actions. |
(c) | Related to the redemption of the $500 million aggregate principal amount of senior notes due 2025 in April 2022 that were previously issued by a wholly-owned subsidiary of the Company. |
(d) | Related to the write-down of the Skip Hop tradename asset. |
Note: No adjustments were made to GAAP results in the third quarter of fiscal 2022. Results may not be additive due to rounding.
CARTER’S, INC. RECONCILIATION OF NET INCOME ALLOCABLE TO COMMON SHAREHOLDERS (unaudited) | |||||||||||||||
Fiscal Quarter Ended | Two Fiscal Quarters Ended | ||||||||||||||
July 1, | July 2, | July 1, | July 2, | ||||||||||||
Weighted-average number of common and common equivalent shares outstanding: | |||||||||||||||
Basic number of common shares outstanding | 36,824,490 | 39,344,834 | 36,964,509 | 39,807,354 | |||||||||||
Dilutive effect of equity awards | 127 | 29,153 | 3,850 | 48,274 | |||||||||||
Diluted number of common and common equivalent shares outstanding | 36,824,617 | 39,373,987 | 36,968,359 | 39,855,628 | |||||||||||
As reported on a GAAP Basis: | |||||||||||||||
(dollars in thousands, except per share data) | |||||||||||||||
Basic net income per common share: | |||||||||||||||
Net income | $ | 23,867 | $ | 36,970 | $ | 59,863 | $ | 104,903 | |||||||
Income allocated to participating securities | (426 | ) | (536 | ) | (1,018 | ) | (1,480 | ) | |||||||
Net income available to common shareholders | $ | 23,441 | $ | 36,434 | $ | 58,845 | $ | 103,423 | |||||||
Basic net income per common share | $ | 0.64 | $ | 0.93 | $ | 1.59 | $ | 2.60 | |||||||
Diluted net income per common share: | |||||||||||||||
Net income | $ | 23,867 | $ | 36,970 | $ | 59,863 | $ | 104,903 | |||||||
Income allocated to participating securities | (426 | ) | (536 | ) | (1,018 | ) | (1,479 | ) | |||||||
Net income available to common shareholders | $ | 23,441 | $ | 36,434 | $ | 58,845 | $ | 103,424 | |||||||
Diluted net income per common share | $ | 0.64 | $ | 0.93 | $ | 1.59 | $ | 2.59 | |||||||
As adjusted (a): | |||||||||||||||
Basic net income per common share: | |||||||||||||||
Net income | $ | 24,165 | $ | 52,121 | $ | 61,044 | $ | 120,053 | |||||||
Income allocated to participating securities | (431 | ) | (774 | ) | (1,040 | ) | (1,705 | ) | |||||||
Net income available to common shareholders | $ | 23,734 | $ | 51,347 | $ | 60,004 | $ | 118,348 | |||||||
Basic net income per common share | $ | 0.64 | $ | 1.31 | $ | 1.62 | $ | 2.97 | |||||||
Diluted net income per common share: | |||||||||||||||
Net income | $ | 24,165 | $ | 52,121 | $ | 61,044 | $ | 120,053 | |||||||
Income allocated to participating securities | (431 | ) | (774 | ) | (1,040 | ) | (1,704 | ) | |||||||
Net income available to common shareholders | $ | 23,734 | $ | 51,347 | $ | 60,004 | $ | 118,349 | |||||||
Diluted net income per common share | $ | 0.64 | $ | 1.30 | $ | 1.62 | $ | 2.97 | |||||||
(a) | In addition to the results provided in this earnings release in accordance with GAAP, the Company has provided adjusted, non-GAAP financial measurements that present per share data excluding the adjustments discussed above. The Company has excluded $0.3 million and $1.2 million in after-tax expenses from these results for the fiscal quarter and two fiscal quarters ended July 1, 2023, respectively. The Company has excluded $15.2 million in after-tax expenses from these results for both the fiscal quarter and two fiscal quarters ended July 2, 2022. |
Note: Results may not be additive due to rounding.
RECONCILIATION OF U.S. GAAP AND NON-GAAP INFORMATION (dollars in millions) (unaudited) | ||||||||||||||||||||
The following table provides a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods indicated: | ||||||||||||||||||||
Fiscal Quarter Ended | Two Fiscal Quarters Ended | Four Fiscal Quarters Ended | ||||||||||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | July 1, 2023 | ||||||||||||||||
Net income | $ | 23.9 | $ | 37.0 | $ | 59.9 | $ | 104.9 | $ | 205.0 | ||||||||||
Interest expense | 8.1 | 8.7 | 17.7 | 23.8 | 36.7 | |||||||||||||||
Interest income | (1.0 | ) | (0.3 | ) | (1.7 | ) | (0.6 | ) | (2.4 | ) | ||||||||||
Income tax expense | 7.4 | 10.1 | 19.1 | 30.5 | 55.2 | |||||||||||||||
Depreciation and amortization | 16.8 | 17.5 | 32.5 | 31.7 | 66.1 | |||||||||||||||
EBITDA | $ | 55.1 | $ | 73.0 | $ | 127.5 | $ | 190.3 | $ | 360.7 | ||||||||||
Adjustments to EBITDA | ||||||||||||||||||||
Organizational restructuring (a) | $ | 0.4 | $ | — | $ | 1.5 | $ | — | $ | 1.5 | ||||||||||
Loss on extinguishment of debt (b) | — | 19.9 | — | 19.9 | $ | — | ||||||||||||||
Intangible asset impairment (c) | — | — | — | — | 9.0 | |||||||||||||||
Total adjustments | 0.4 | 19.9 | 1.5 | 19.9 | 10.5 | |||||||||||||||
Adjusted EBITDA | $ | 55.5 | $ | 92.9 | $ | 129.0 | $ | 210.2 | $ | 371.2 | ||||||||||
a. | Net expenses related to organizational restructuring and related corporate office lease amendment actions. |
b. | Related to the redemption of the $500 million aggregate principal amount of senior notes due 2025 in April 2022 that were previously issued by a wholly-owned subsidiary of the Company. |
c. | Related to the write-down of the Skip Hop tradename asset. |
Note: Results may not be additive due to rounding.
EBITDA and Adjusted EBITDA are supplemental financial measures that are not defined or prepared in accordance with GAAP. We define EBITDA as net income before interest, income taxes, and depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items described in footnotes (a) - (c) to the table above.
We present EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. These measures also afford investors a view of what management considers to be the Company's core performance.
The use of EBITDA and Adjusted EBITDA instead of net income or cash flows from operations has limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. EBITDA and Adjusted EBITDA do not represent net income or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. While EBITDA, Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. EBITDA and Adjusted EBITDA do not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us for working capital, debt service and other purposes.
RECONCILIATION OF U.S. GAAP AND NON-GAAP INFORMATION (dollars in millions) (unaudited) | ||||||||||||||||||
The table below reflects the calculation of constant currency net sales on a consolidated and International segment basis for the fiscal quarter and two fiscal quarters ended July 1, 2023: | ||||||||||||||||||
Fiscal Quarter Ended | ||||||||||||||||||
Reported Net Sales | Impact of Foreign Currency Translation | Constant-Currency Net Sales | Reported Net Sales | Reported Net Sales % Change | Constant-Currency Net Sales % Change | |||||||||||||
Consolidated net sales | $ | 600.2 | $ | (1.2 | ) | $ | 601.4 | $ | 700.7 | (14.3 | )% | (14.2 | )% | |||||
International segment net sales | $ | 89.9 | $ | (1.2 | ) | $ | 91.0 | $ | 97.6 | (7.9 | )% | (6.7 | )% | |||||
Two Fiscal Quarters Ended | ||||||||||||||||||
Reported Net Sales | Impact of Foreign Currency Translation | Constant-Currency Net Sales | Reported Net Sales | Reported Net Sales % Change | Constant-Currency Net Sales % Change | |||||||||||||
Consolidated net sales | $ | 1,296.1 | $ | (3.3 | ) | $ | 1,299.4 | $ | 1,482.0 | (12.5 | )% | (12.3 | )% | |||||
International segment net sales | $ | 182.0 | $ | (3.3 | ) | $ | 185.4 | $ | 205.2 | (11.3 | )% | (9.7 | )% | |||||
Note: Results may not be additive due to rounding.
The Company evaluates its net sales on both an "as reported" and a "constant currency" basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates that occurred between the comparative periods. Constant currency net sales results are calculated by translating current period net sales in local currency to the U.S. dollar amount by using the currency conversion rate for the prior comparative period. The Company consistently applies this approach to net sales for all countries where the functional currency is not the U.S. dollar. The Company believes that the presentation of net sales on a constant currency basis provides useful supplemental information regarding changes in our net sales that were not due to fluctuations in currency exchange rates and such information is consistent with how the Company assesses changes in its net sales between comparative periods.
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Contacts
Sean McHugh
Vice President & Treasurer
(678) 791-7615
