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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to __________
Commission file number: 001-31829
CARTER’S, INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 13-3912933 |
(State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
incorporation or organization) | | |
Phipps Tower,
3438 Peachtree Road NE, Suite 1800
Atlanta, Georgia 30326
(Address of principal executive offices, including zip code)
(678) 791-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common stock, par value $0.01 per share | CRI | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No x
As of October 20, 2023, there were 36,824,808 shares of the registrant’s common stock outstanding.
CARTER’S, INC.
INDEX
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| | Unaudited Condensed Consolidated Balance Sheets as of September 30, 2023, December 31, 2022 and October 1, 2022 | |
| | Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and three fiscal quarters ended September 30, 2023 and October 1, 2022 | |
| | Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and three fiscal quarters ended September 30, 2023 and October 1, 2022 | |
| | Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the fiscal quarters ended September 30, 2023, July 1, 2023, April 1, 2023, October 1, 2022, July 2, 2022 and April 2, 2022 | |
| | Unaudited Condensed Consolidated Statements of Cash Flows for the three fiscal quarters ended September 30, 2023 and October 1, 2022 | |
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Part II. Other Information | |
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Certifications | |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | October 1, 2022 |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 169,106 | | | $ | 211,748 | | | $ | 121,649 | |
Accounts receivable, net of allowance for credit losses of $6,741, $7,189, and $6,290, respectively | 240,507 | | | 198,587 | | | 265,593 | |
Finished goods inventories, net of inventory reserves of $19,014, $19,268, and $25,628, respectively | 620,669 | | | 744,573 | | | 899,326 | |
Prepaid expenses and other current assets(*) | 37,604 | | | 33,812 | | | 59,964 | |
Total current assets | 1,067,886 | | | 1,188,720 | | | 1,346,532 | |
Property, plant, and equipment, net of accumulated depreciation of $605,857, $569,528, and $559,085, respectively | 180,888 | | | 189,822 | | | 181,575 | |
Operating lease assets | 506,010 | | | 492,335 | | | 491,863 | |
Tradenames, net | 298,230 | | | 298,393 | | | 307,456 | |
Goodwill | 209,494 | | | 209,333 | | | 208,454 | |
Customer relationships, net | 28,087 | | | 30,564 | | | 31,386 | |
Other assets | 29,211 | | | 30,548 | | | 30,687 | |
Total assets | $ | 2,319,806 | | | $ | 2,439,715 | | | $ | 2,597,953 | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 222,210 | | | $ | 264,078 | | | $ | 318,026 | |
Current operating lease liabilities(*) | 135,865 | | | 142,432 | | | 141,585 | |
Other current liabilities | 106,122 | | | 122,439 | | | 92,394 | |
Total current liabilities | 464,197 | | | 528,949 | | | 552,005 | |
Long-term debt, net | 567,168 | | | 616,624 | | | 736,448 | |
Deferred income taxes | 41,217 | | | 41,235 | | | 48,930 | |
Long-term operating lease liabilities | 427,280 | | | 421,741 | | | 430,479 | |
Other long-term liabilities | 34,633 | | | 34,757 | | | 41,889 | |
Total liabilities | $ | 1,534,495 | | | $ | 1,643,306 | | | $ | 1,809,751 | |
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Commitments and contingencies - Note 12 | | | | | |
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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; 36,969,967, 37,692,132, and 38,456,219 shares issued and outstanding, respectively | 370 | | | 377 | | | 385 | |
Additional paid-in capital | — | | | — | | | — | |
Accumulated other comprehensive loss | (29,142) | | | (34,338) | | | (40,575) | |
Retained earnings | 814,083 | | | 830,370 | | | 828,392 | |
Total stockholders’ equity | 785,311 | | | 796,409 | | | 788,202 | |
Total liabilities and stockholders’ equity | $ | 2,319,806 | | | $ | 2,439,715 | | | $ | 2,597,953 | |
(*)Prepaid expenses and other current assets and Current operating lease liabilities as of October 1, 2022 were revised to reflect the presentation for payments of rent before payment due date of $13.6 million.
See accompanying notes to the unaudited condensed consolidated financial statements.
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
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| Fiscal quarter ended | | Three fiscal quarters ended |
| September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 |
Net sales | $ | 791,651 | | | $ | 818,624 | | | $ | 2,087,730 | | | $ | 2,300,603 | |
Cost of goods sold | 415,254 | | | 448,096 | | | 1,109,970 | | | 1,243,794 | |
| | | | | | | |
Gross profit | 376,397 | | | 370,528 | | | 977,760 | | | 1,056,809 | |
Royalty income, net | 5,713 | | | 7,273 | | | 16,573 | | | 20,349 | |
Selling, general, and administrative expenses | 288,680 | | | 286,218 | | | 806,988 | | | 807,533 | |
| | | | | | | |
| | | | | | | |
Operating income | 93,430 | | | 91,583 | | | 187,345 | | | 269,625 | |
Interest expense | 8,615 | | | 9,712 | | | 26,342 | | | 33,496 | |
Interest income | (1,064) | | | (257) | | | (2,769) | | | (867) | |
Other expense (income), net | 507 | | | 1,270 | | | (518) | | | 776 | |
Loss on extinguishment of debt | — | | | — | | | — | | | 19,940 | |
Income before income taxes | 85,372 | | | 80,858 | | | 164,290 | | | 216,280 | |
Income tax provision | 19,245 | | | 15,901 | | | 38,300 | | | 46,421 | |
Net income | $ | 66,127 | | | $ | 64,957 | | | $ | 125,990 | | | $ | 169,859 | |
| | | | | | | |
Basic net income per common share | $ | 1.78 | | | $ | 1.67 | | | $ | 3.36 | | | $ | 4.26 | |
Diluted net income per common share | $ | 1.78 | | | $ | 1.67 | | | $ | 3.36 | | | $ | 4.26 | |
Dividend declared and paid per common share | $ | 0.75 | | | $ | 0.75 | | | $ | 2.25 | | | $ | 2.25 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal quarter ended | | Three fiscal quarters ended | | |
| September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 | | |
Net income | $ | 66,127 | | | $ | 64,957 | | | $ | 125,990 | | | $ | 169,859 | | | |
Other comprehensive (loss) income: | | | | | | | | | |
| | | | | | | | | |
Foreign currency translation adjustments | (4,179) | | | (8,372) | | | 5,196 | | | (11,677) | | | |
Comprehensive income | $ | 61,948 | | | $ | 56,585 | | | $ | 131,186 | | | $ | 158,182 | | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands, except share amounts)
(unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock - shares | | Common stock - $ | | Additional paid-in capital | | Accumulated other comprehensive loss | | Retained earnings | | Total stockholders’ equity |
Balance at January 1, 2022 | 41,148,870 | | | $ | 411 | | | $ | — | | | $ | (28,897) | | | $ | 978,672 | | | $ | 950,186 | |
Exercise of stock options | 5,100 | | | — | | | 222 | | | — | | | — | | | 222 | |
Withholdings from vesting of restricted stock | (70,452) | | | — | | | (6,623) | | | — | | | — | | | (6,623) | |
Restricted stock activity | 265,412 | | | 3 | | | (3) | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | 5,859 | | | — | | | — | | | 5,859 | |
| | | | | | | | | | | |
Repurchase of common stock | (793,008) | | | (8) | | | 545 | | | — | | | (75,033) | | | (74,496) | |
Cash dividends declared and paid of $0.75 per common share | — | | | — | | | — | | | — | | | (30,573) | | | (30,573) | |
Comprehensive income | — | | | — | | | — | | | 2,782 | | | 67,933 | | | 70,715 | |
Balance at April 2, 2022 | 40,555,922 | | | $ | 406 | | | $ | — | | | $ | (26,115) | | | $ | 940,999 | | | $ | 915,290 | |
Exercise of stock options | 1,500 | | | — | | | 89 | | | — | | | — | | | 89 | |
Withholdings from vesting of restricted stock | (705) | | | — | | | (58) | | | — | | | — | | | (58) | |
Restricted stock activity | 30,731 | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | 6,359 | | | — | | | — | | | 6,359 | |
Repurchase of common stock | (1,272,354) | | | (13) | | | (6,390) | | | — | | | (95,407) | | | (101,810) | |
Cash dividends declared and paid of $0.75 per common share | — | | | — | | | — | | | — | | | (29,886) | | | (29,886) | |
Comprehensive income | — | | | — | | | — | | | (6,088) | | | 36,970 | | | 30,882 | |
Balance at July 2, 2022 | 39,315,094 | | | $ | 393 | | | $ | — | | | $ | (32,203) | | | $ | 852,676 | | | $ | 820,866 | |
Exercise of stock options | 7,850 | | | — | | | 465 | | | — | | | — | | | 465 | |
Withholdings from vesting of restricted stock | (2,065) | | | — | | | (169) | | | — | | | — | | | (169) | |
Restricted stock activity | 12,459 | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | 5,003 | | | — | | | — | | | 5,003 | |
Repurchase of common stock | (877,119) | | | (8) | | | (5,299) | | | — | | | (60,138) | | | (65,445) | |
Cash dividends declared and paid of $0.75 per common share | — | | | — | | | — | | | — | | | (29,103) | | | (29,103) | |
Comprehensive income | — | | | — | | | — | | | (8,372) | | | 64,957 | | | 56,585 | |
Balance at October 1, 2022 | 38,456,219 | | | $ | 385 | | | $ | — | | | $ | (40,575) | | | $ | 828,392 | | | $ | 788,202 | |
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
(amounts in thousands, except share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock - shares | | Common stock - $ | | Additional paid-in capital | | Accumulated other comprehensive loss | | Retained earnings | | Total stockholders’ equity |
Balance at December 31, 2022 | 37,692,132 | | | $ | 377 | | | $ | — | | | $ | (34,338) | | | $ | 830,370 | | | $ | 796,409 | |
Exercise of stock options | 1,400 | | | — | | | 83 | | | — | | | — | | | 83 | |
Withholdings from vesting of restricted stock | (61,423) | | | (1) | | | (4,404) | | | — | | | (371) | | | (4,776) | |
Restricted stock activity | 303,015 | | | 3 | | | (3) | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | 4,343 | | | — | | | — | | | 4,343 | |
Repurchase of common stock | (135,873) | | | (1) | | | — | | | — | | | (9,585) | | | (9,586) | |
Cash dividends declared and paid of $0.75 per common share | — | | | — | | | — | | | — | | | (28,483) | | | (28,483) | |
Comprehensive income | — | | | — | | | — | | | 3,926 | | | 35,996 | | | 39,922 | |
Other | — | | | — | | | (19) | | | — | | | — | | | (19) | |
Balance at April 1, 2023 | 37,799,251 | | | $ | 378 | | | $ | — | | | $ | (30,412) | | | $ | 827,927 | | | $ | 797,893 | |
| | | | | | | | | | | |
Withholdings from vesting of restricted stock | (932) | | | — | | | (61) | | | — | | | — | | | (61) | |
Restricted stock activity | 5,626 | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | 6,641 | | | — | | | — | | | 6,641 | |
Repurchase of common stock | (449,481) | | | (4) | | | (6,294) | | | — | | | (24,038) | | | (30,336) | |
Cash dividends declared and paid of $0.75 per common share | — | | | — | | | — | | | — | | | (28,158) | | | (28,158) | |
Comprehensive income | — | | | — | | | — | | | 5,449 | | | 23,867 | | | 29,316 | |
Other | — | | | — | | | (286) | | | — | | | — | | | (286) | |
Balance at July 1, 2023 | 37,354,464 | | | $ | 374 | | | $ | — | | | $ | (24,963) | | | $ | 799,598 | | | $ | 775,009 | |
Exercise of stock options | 4,400 | | | — | | | 301 | | | — | | | — | | | 301 | |
Withholdings from vesting of restricted stock | (2,359) | | | — | | | (170) | | | — | | | — | | | (170) | |
Restricted stock activity | 3,466 | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | 3,928 | | | — | | | — | | | 3,928 | |
Repurchase of common stock | (390,004) | | | (4) | | | (3,786) | | | — | | | (23,780) | | | (27,570) | |
Cash dividends declared and paid of $0.75 per common share | — | | | — | | | — | | | — | | | (27,862) | | | (27,862) | |
Comprehensive income | — | | | — | | | — | | | (4,179) | | | 66,127 | | | 61,948 | |
Other | — | | | — | | | (273) | | | — | | | — | | | (273) | |
Balance at September 30, 2023 | 36,969,967 | | | $ | 370 | | | $ | — | | | $ | (29,142) | | | $ | 814,083 | | | $ | 785,311 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
| | | | | | | | | | | |
| Three fiscal quarters ended |
| September 30, 2023 | | October 1, 2022 |
Cash flows from operating activities: | | | |
Net income | $ | 125,990 | | | $ | 169,859 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Depreciation of property, plant, and equipment | 45,764 | | | 46,011 | |
Amortization of intangible assets | 2,805 | | | 2,798 | |
(Recoveries of) provisions for excess and obsolete inventory, net | (324) | | | 11,488 | |
Gain on partial termination of corporate lease | (4,366) | | | — | |
| | | |
| | | |
Other asset impairments and loss on disposal of property, plant and equipment, net of recoveries | 2,807 | | | 251 | |
Amortization of debt issuance costs | 1,186 | | | 1,560 | |
Stock-based compensation expense | 14,912 | | | 17,221 | |
Unrealized foreign currency exchange (gain) loss, net | (201) | | | 268 | |
Provisions for (recoveries of) doubtful accounts receivable from customers | 2,402 | | | (987) | |
Unrealized (gain) loss on investments | (1,391) | | | 2,414 | |
Loss on extinguishment of debt | — | | | 19,940 | |
Deferred income taxes (benefit) expense | (949) | | | 8,220 | |
Other | — | | | 919 | |
Effect of changes in operating assets and liabilities: | | | |
Accounts receivable | (43,623) | | | (33,697) | |
Finished goods inventories | 127,190 | | | (270,696) | |
Prepaid expenses and other assets(1)(2) | (3,965) | | | (11,359) | |
Accounts payable and other liabilities(1)(2) | (62,447) | | | (181,690) | |
Net cash provided by (used in) operating activities | $ | 205,790 | | | $ | (217,480) | |
| | | |
Cash flows from investing activities: | | | |
Capital expenditures | $ | (42,470) | | | $ | (26,862) | |
| | | |
| | | |
Net cash used in investing activities | $ | (42,470) | | | $ | (26,862) | |
| | | |
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 | 70,000 | | | 240,000 | |
Payments on secured revolving credit facility | (120,000) | | | — | |
Repurchases of common stock | (67,492) | | | (241,751) | |
Dividends paid | (84,503) | | | (89,562) | |
Withholdings from vesting of restricted stock | (5,007) | | | (6,850) | |
Proceeds from exercises of stock options | 384 | | | 776 | |
Other | — | | | (919) | |
Net cash used in financing activities | $ | (206,618) | | | $ | (616,404) | |
| | | |
Net effect of exchange rate changes on cash and cash equivalents | 656 | | | (1,899) | |
Net decrease in cash and cash equivalents | $ | (42,642) | | | $ | (862,645) | |
Cash and cash equivalents, beginning of period | 211,748 | | | 984,294 | |
Cash and cash equivalents, end of period | $ | 169,106 | | | $ | 121,649 | |
(1)Cash flows for the first three fiscal quarters ended October 1, 2022 were revised to reflect the presentation for payments of rent before payment due date of $13.6 million.
(2)Operating lease assets obtained in exchange for operating lease liabilities were $123.1 million and $108.6 million for the first three fiscal quarters ended September 30, 2023 and first three fiscal quarters ended October 1, 2022, respectively.
See accompanying notes to the unaudited condensed consolidated financial statements.
CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY
Carter’s, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) design, source, and market branded childrenswear under the Carter’s, OshKosh B’gosh (or “OshKosh”), Skip Hop, Child of Mine, Just One You, Simple Joys, Little Planet, and other brands. The Company’s products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to leading department stores, national chains, and specialty retailers domestically and internationally and for sale in the Company’s retail stores and on its eCommerce sites that market its brand name merchandise and other licensed products manufactured by other companies.
Our trademarks that are referred to in this Quarterly Report on Form 10-Q, including Carter’s, OshKosh B’gosh, OshKosh, Child of Mine, Just One You, Simple Joys, Little Planet, and other brands, many of which are registered in the United States and in over 100 other countries and territories, are each the property of one or more subsidiaries of Carter’s, Inc.
NOTE 2 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). All intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, comprehensive income, statement of shareholders’ equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter ended September 30, 2023 are not necessarily indicative of the results that may be expected for the current fiscal year ending December 30, 2023.
The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
The accompanying condensed consolidated balance sheet as of December 31, 2022 was derived from the Company’s audited consolidated financial statements included in its most recently filed Annual Report on Form 10-K. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q.
We have recast the consolidated statement of operations for the fiscal quarter and three fiscal quarters ended October 1, 2022 to conform to our current presentation of combining Adverse purchase commitments within Cost of goods sold.
Inventories
Our inventories, which consist primarily of finished goods, are stated at the lower of cost (first-in, first-out basis for wholesale inventory and average cost for retail inventories) or net realizable value. Inventories at September 30, 2023 were $620.7 million compared to $899.3 million at October 1, 2022 and $744.6 million at December 31, 2022. The decrease of $278.7 million, or 31.0%, at September 30, 2023 compared to October 1, 2022 is primarily due to decreased in-transit inventory, decreased “pack and hold” inventory, and lower forecasted net sales for fiscal 2023. Due to the seasonal nature of our operations, the inventories balance at September 30, 2023 is not comparable to the inventories balance at December 31, 2022.
Adjustments to bring inventory to net realizable value as a result of obsolete, damaged, and excess inventory at September 30, 2023 decreased 25.8% compared to October 1, 2022. These adjustments as a percentage of gross inventory have remained relatively stable due to the overall quality and planned use of the inventory. The liability for adverse inventory and fabric purchase commitments decreased from $3.1 million as of October 1, 2022 to $0.8 million as of September 30, 2023, primarily due to settlements with vendors for canceled production and the utilization of previously reserved fabric.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Supply Chain Financing Program
We have established a voluntary supply chain finance (“SCF”) program through participating financial institutions. This SCF program enables participating suppliers to accelerate payments for receivables due from the Company by selling them directly to the participating financial institutions at their discretion. As of September 30, 2023, the SCF program has a $70.0 million revolving capacity. We are not a party to the agreements between the participating financial institutions and the suppliers in connection with the SCF program. The payment terms with the majority of our suppliers are 90 days, irrespective of whether a supplier participates in the SCF program. No guarantees are provided by the Company or any of our subsidiaries under the SCF program.
The Company’s liability related to amounts payable to the participating financial institution for suppliers who voluntarily participate in the SCF program are included in Accounts payable on our condensed consolidated balance sheets. Amounts under the SCF program included in Accounts payable were $16.7 million, $16.5 million, and $15.3 million as of September 30, 2023, December 31, 2022, and October 1, 2022, respectively. Payments made in connection with the SCF program, like payments of other accounts payable, are reflected as a reduction to our operating cash flow.
Accounting Policies
The accounting policies the Company follows are set forth in its most recently filed Annual Report on Form 10-K. There have been no material changes to these accounting policies. New accounting pronouncements adopted at the beginning of fiscal 2023 are noted below.
Recent Accounting Pronouncements
Supplier Finance Programs (ASU 2022-04)
In September 2022, the FASB issued Accounting Standards Update No. 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”). This new guidance is designed to enhance transparency around supplier finance programs by requiring new disclosures that would allow a user of the financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the disclosure of the rollforward of annual activity, which is effective for fiscal years beginning after December 15, 2023. The effect of the adoption of ASU 2022-04 was not material to the Company’s consolidated financial statements.
NOTE 3 - REVENUE RECOGNITION
The Company’s revenues are earned from contracts or arrangements with retail and wholesale customers and licensees. Contracts include written agreements, as well as arrangements that are implied by customary practices or law.
Disaggregation of Revenue
The Company sells its products directly to consumers (“direct-to-consumer”) and to other retail companies and partners that subsequently sell the products directly to their own retail customers (“wholesale channel”). The Company also earns royalties from certain of its licensees. Disaggregated revenues from these sources for the fiscal periods indicated were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal quarter ended September 30, 2023 |
(dollars in thousands) | | U.S. Retail | | U.S. Wholesale | | International | | Total |
Wholesale channel | | $ | — | | | $ | 300,338 | | | $ | 45,842 | | | $ | 346,180 | |
Direct-to-consumer | | 374,796 | | | — | | | 70,675 | | | 445,471 | |
| | | | | | | | |
| | $ | 374,796 | | | $ | 300,338 | | | $ | 116,517 | | | $ | 791,651 | |
| | | | | | | | |
Royalty income, net | | $ | 2,236 | | | $ | 3,147 | | | $ | 330 | | | $ | 5,713 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three fiscal quarters ended September 30, 2023 |
(dollars in thousands) | | U.S. Retail | | U.S. Wholesale | | International | | Total |
Wholesale channel | | $ | — | | | $ | 767,194 | | | $ | 117,547 | | | $ | 884,741 | |
Direct-to-consumer | | 1,021,983 | | | — | | | 181,006 | | | 1,202,989 | |
| | | | | | | | |
| | $ | 1,021,983 | | | $ | 767,194 | | | $ | 298,553 | | | $ | 2,087,730 | |
| | | | | | | | |
Royalty income, net | | $ | 5,746 | | | $ | 8,694 | | | $ | 2,133 | | | $ | 16,573 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal quarter ended October 1, 2022 |
(dollars in thousands) | | U.S. Retail | | U.S. Wholesale | | International | | Total |
Wholesale channel | | $ | — | | | $ | 288,454 | | | $ | 50,489 | | | $ | 338,943 | |
Direct-to-consumer | | 408,209 | | | — | | | 71,472 | | | 479,681 | |
| | | | | | | | |
| | $ | 408,209 | | | $ | 288,454 | | | $ | 121,961 | | | $ | 818,624 | |
| | | | | | | | |
Royalty income, net | | $ | 3,073 | | | $ | 3,349 | | | $ | 851 | | | $ | 7,273 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three fiscal quarters ended October 1, 2022 |
(dollars in thousands) | | U.S. Retail | | U.S. Wholesale | | International | | Total |
Wholesale channel | | $ | — | | | $ | 819,772 | | | $ | 137,940 | | | $ | 957,712 | |
Direct-to-consumer | | 1,153,664 | | | — | | | 189,227 | | | 1,342,891 | |
| | | | | | | | |
| | $ | 1,153,664 | | | $ | 819,772 | | | $ | 327,167 | | | $ | 2,300,603 | |
| | | | | | | | |
Royalty income, net | | $ | 7,631 | | | $ | 9,664 | | | $ | 3,054 | | | $ | 20,349 | |
Accounts Receivable from Customers and Licensees
The components of Accounts receivable, net, were as follows:
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | September 30, 2023 | | December 31, 2022 | | October 1, 2022 |
Trade receivables from wholesale customers, net | | $ | 239,493 | | | $ | 195,078 | | | $ | 260,635 | |
Royalties receivable | | 5,825 | | | 5,386 | | | 6,823 | |
Other receivables(1) | | 10,898 | | | 14,571 | | | 13,673 | |
Total gross receivables | | $ | 256,216 | | | $ | 215,035 | | | $ | 281,131 | |
Less: Wholesale accounts receivable reserves(2)(3) | | (15,709) | | | (16,448) | | | (15,538) | |
Accounts receivable, net | | $ | 240,507 | | | $ | 198,587 | | | $ | 265,593 | |
(1)Includes tax, payroll, gift card and other receivables.
(2)Includes allowance for chargebacks of $9.0 million, $9.3 million, and $9.2 million for the periods ended September 30, 2023, December 31, 2022, and October 1, 2022, respectively.
(3)Includes allowance for credit losses of $6.7 million, $7.2 million, and $6.3 million for the periods ended September 30, 2023, December 31, 2022, and October 1, 2022, respectively.
Contract Assets and Liabilities
The Company’s contract assets are not material.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Contract Liabilities
The Company recognizes a contract liability when it has received consideration from a customer and has a future obligation to transfer goods to the customer. Total contract liabilities consisted of the following amounts:
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | September 30, 2023 | | December 31, 2022 | | October 1, 2022 |
Contract liabilities - current: | | | | | |
Unredeemed gift cards | $ | 23,983 | | | $ | 23,303 | | | $ | 21,217 | |
Unredeemed customer loyalty rewards | 4,020 | | | 5,276 | | | 7,527 | |
Carter’s credit card - upfront bonus(1) | 714 | | | 714 | | | 714 | |
Total contract liabilities - current(2) | $ | 28,717 | | | $ | 29,293 | | | $ | 29,458 | |
| | | | | |
Contract liabilities - non-current(3) | $ | 893 | | | $ | 1,429 | | | $ | 1,607 | |
Total contract liabilities | $ | 29,610 | | | $ | 30,722 | | | $ | 31,065 | |
(1)The Company received an upfront signing bonus from a third-party financial institution, which will be recognized as revenue on a straight-line basis over the term of the agreement. This amount reflects the current portion of this bonus to be recognized as revenue over the next twelve months.
(2)Included with Other current liabilities on the Company’s condensed consolidated balance sheets.
(3)This amount reflects the non-current portion of the Carter’s credit card upfront bonus and is included within Other long-term liabilities on the Company’s condensed consolidated balance sheets.
NOTE 4 – ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of Accumulated other comprehensive loss consisted of the following:
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | September 30, 2023 | | December 31, 2022 | | October 1, 2022 |
Cumulative foreign currency translation adjustments | $ | (23,630) | | | $ | (28,826) | | | $ | (32,980) | |
Pension and post-retirement obligations(*) | (5,512) | | | (5,512) | | | (7,595) | |
Total accumulated other comprehensive loss | $ | (29,142) | | | $ | (34,338) | | | $ | (40,575) | |
(*)Net of income taxes of $1.7 million, $1.7 million, and $2.4 million for the period ended September 30, 2023, December 31, 2022, and October 1, 2022, respectively.
During the first three quarters of both fiscal 2023 and fiscal 2022, no amounts were reclassified from Accumulated other comprehensive loss to the consolidated statement of operations.
NOTE 5 – COMMON STOCK
Open Market Share Repurchases
The Company repurchased and retired shares in open market transactions in the following amounts for the fiscal periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal quarter ended | | Three fiscal quarters ended |
| September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 |
Number of shares repurchased | 390,004 | | | 877,119 | | | 975,358 | | | 2,942,481 | |
Aggregate cost of shares repurchased (dollars in thousands)(*) | $ | 27,570 | | | $ | 65,445 | | | $ | 67,492 | | | $ | 241,751 | |
Average price per share(*) | $ | 70.69 | | | $ | 74.61 | | | $ | 69.20 | | | $ | 82.16 | |
(*)The aggregate cost of share repurchases and average price paid per share excludes excise tax on share repurchases imposed as part of the Inflation Reduction Act of 2022.
The total aggregate remaining capacity under outstanding repurchase authorizations as of September 30, 2023 was approximately $682.0 million, based on settled repurchase transactions. The share repurchase authorizations have no expiration date.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Inflation Reduction Act of 2022 imposed a nondeductible 1% excise tax on the net value of certain share repurchases made after December 31, 2022. Beginning in fiscal year 2023, the Company reflected the applicable excise tax in Additional paid-in capital on the Company’s condensed consolidated balance sheets as part of the cost basis of the shares repurchased. The corresponding liability for the excise tax payable is recorded in Other current liabilities on the Company’s condensed consolidated balance sheets.
Future repurchases may occur from time to time in the open market, in privately negotiated transactions, or otherwise. The timing and amount of any repurchases will be at the discretion of the Company subject to restrictions under the Company’s secured revolving credit facility, market conditions, stock price, other investment priorities, and other factors.
Dividends
In each of the first three quarters of fiscal 2023, the Board of Directors declared, and the Company paid, a cash dividend per common share of $0.75 (for an aggregate cash dividend per common share of $2.25 for the first three quarters of fiscal 2023). Additionally, in each of the first three quarters of fiscal 2022, the Board of Directors declared, and the Company paid, a cash dividend per common share of $0.75 (for an aggregate cash dividend per common share of $2.25 for the first three quarters of fiscal 2022). The Board of Directors will evaluate future dividend declarations based on a number of factors, including restrictions under the Company’s secured revolving credit facility, business conditions, the Company’s financial performance, and other considerations.
Provisions in the Company’s secured revolving credit facility could have the effect of restricting the Company’s ability to pay cash dividends on, or make future repurchases of, its common stock, as further described in Note 6, Long-term Debt, to the consolidated financial statements.
NOTE 6 – LONG-TERM DEBT
Long-term debt consisted of the following:
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | September 30, 2023 | | December 31, 2022 | | October 1, 2022 |
$500 million 5.625% senior notes due March 15, 2027 | $ | 500,000 | | | $ | 500,000 | | | $ | 500,000 | |
Less unamortized issuance-related costs for senior notes | (2,832) | | | (3,376) | | | (3,552) | |
Senior notes, net | $ | 497,168 | | | $ | 496,624 | | | $ | 496,448 | |
Secured revolving credit facility | 70,000 | | | 120,000 | | | 240,000 | |
Total long-term debt, net | $ | 567,168 | | | $ | 616,624 | | | $ | 736,448 | |
Secured Revolving Credit Facility
As of September 30, 2023, the Company had $70.0 million outstanding borrowings under its secured revolving credit facility, exclusive of $4.4 million of outstanding letters of credit. As of September 30, 2023, there was approximately $775.6 million available for future borrowing. All outstanding borrowings under the Company’s secured revolving credit facility are classified as non-current liabilities on the Company’s condensed consolidated balance sheets because of the contractual repayment terms under the credit facility.
The Company’s secured revolving credit facility provides for an aggregate credit line of $850 million which includes a $750 million U.S. dollar facility and a $100 million multicurrency facility. The credit facility matures in April 2027. The facility contains covenants that restrict the Company’s ability to, among other things: (i) create or incur liens, debt, guarantees or other investments, (ii) engage in mergers and consolidations, (iii) pay dividends or other distributions to, and redemptions and repurchases from, equity holders, (iv) prepay, redeem or repurchase subordinated or junior debt, (v) amend organizational documents, and (vi) engage in certain transactions with affiliates.
On October 17, 2023, Carter’s Holdings B.V., a subsidiary of the Company, was released from its obligations under the secured revolving credit facility.
As of September 30, 2023, the interest rate margins applicable to the secured revolving credit facility were 1.125% for adjusted term Secured Overnight Financing Rate (“SOFR”) loans and 0.125% for base rate loans. As of September 30, 2023, U.S. dollar borrowings outstanding under the secured revolving credit facility accrued interest at an adjusted term SOFR rate plus the applicable margin, which resulted in a weighted-average borrowing rate of 6.55%. There were no foreign currency borrowings outstanding on September 30, 2023. As of September 30, 2023, the Company was in compliance with its financial and other covenants under the secured revolving credit facility.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 – STOCK-BASED COMPENSATION
The Company recorded stock-based compensation expense as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal quarter ended | | Three fiscal quarters ended |
(dollars in thousands) | September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 |
Stock options | $ | — | | | $ | 8 | | | $ | — | | | $ | 186 | |
Restricted stock: | | | | | | | |
Time-based awards | 4,353 | | | 4,506 | | | 12,898 | | | 13,961 | |
Performance-based awards | (425) | | | 489 | | | 464 | | | 1,368 | |
Stock awards | — | | | — | | | 1,550 | | | 1,706 | |
Total | $ | 3,928 | | | $ | 5,003 | | | $ | 14,912 | | | $ | 17,221 | |
The Company recognizes compensation cost ratably over the applicable performance periods based on the estimated probability of achievement of its performance targets at the end of each period. During the third quarter and first three quarters of fiscal 2023, the achievement of performance target estimates related to certain performance-based grants were revised resulting in a reversal of previously recognized stock-based compensation expense of $1.1 million and $1.5 million, respectively.
NOTE 8 – INCOME TAXES
As of September 30, 2023, the Company had gross unrecognized income tax benefits of approximately $9.5 million, of which $6.5 million, if ultimately recognized, may affect the Company’s effective income tax rate in the periods settled. The Company has recorded tax positions for which the ultimate deductibility is more likely than not, but for which there is uncertainty about the timing of such deductions.
Included in the reserves for unrecognized tax benefits at September 30, 2023 is approximately $2.4 million of reserves for which the statute of limitations is expected to expire within the next 12 months. If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective income tax rate for fiscal 2023 along with the effective income tax rate in the quarter in which the benefits are recognized.
The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and recognizes penalties related to unrecognized income tax benefits as a component of income tax expense. Interest expense recorded on uncertain tax positions was not material for the third quarter and first three quarters of fiscal 2023 and fiscal 2022. The Company had approximately $2.0 million, $1.5 million, and $2.3 million of interest accrued on uncertain tax positions as of September 30, 2023, December 31, 2022, and October 1, 2022, respectively.
NOTE 9 – FAIR VALUE MEASUREMENTS
Investments
The Company invests in marketable securities, principally equity-based mutual funds, to mitigate the risk associated with the investment return on employee deferrals of compensation. All of the marketable securities are included in Other assets on the accompanying condensed consolidated balance sheets, and their aggregate fair values were approximately $16.4 million, $15.1 million, and $15.1 million at September 30, 2023, December 31, 2022, and October 1, 2022, respectively. These investments are classified as Level 1 within the fair value hierarchy. The change in the aggregate fair values of marketable securities is due to the net activity of gains and losses and any contributions and distributions during the period. Gains on the investments in marketable securities were $0.8 million and $1.4 million for the third quarter and the first three quarters of fiscal 2023, respectively. Losses on the investments in marketable securities were $0.5 million and $2.4 million for the third quarter and the first three quarters of fiscal 2022, respectively. These amounts are included in Other (income) expense, net on the Company’s condensed consolidated statement of operations.
Borrowings
As of September 30, 2023, the Company had $70.0 million outstanding borrowings under its secured revolving credit facility.
The fair value of the Company’s senior notes at September 30, 2023 was approximately $481.4 million. The fair value of these senior notes with a notional value and carrying value (gross of debt issuance costs) of $500.0 million was estimated using a quoted price as provided in the secondary market, which considers the Company’s credit risk and market related conditions, and is therefore within Level 2 of the fair value hierarchy.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill, Intangible, and Long-Lived Tangible Assets
Some assets are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances. These assets can include goodwill, indefinite-lived intangible assets, and long-lived tangible assets that have been reduced to fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
In the fourth quarter of fiscal 2022, impairment charges of $5.6 million, $3.0 million, and $0.4 million were recorded on our indefinite-lived Skip Hop tradename asset in the U.S. Wholesale, International, and U.S. Retail segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived Skip Hop tradename asset. The carrying value of the indefinite-lived Skip Hop tradename asset as of September 30, 2023 was $6.0 million.
NOTE 10 – EARNINGS PER SHARE
The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal quarter ended | | Three fiscal quarters ended |
| September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 |
Weighted-average number of common and common equivalent shares outstanding: | | | | | | | |
Basic number of common shares outstanding | 36,438,403 | | | 38,222,151 | | | 36,789,140 | | | 39,279,293 | |
Dilutive effect of equity awards | 3,881 | | | 23,222 | | | 3,781 | | | 34,835 | |
Diluted number of common and common equivalent shares outstanding | 36,442,284 | | | 38,245,373 | | | 36,792,921 | | | 39,314,128 | |
| | | | | | | |
Earnings per share: | | | | | | | |
(dollars in thousands, except per share data) | | | | | | | |
Basic net income per common share: | | | | | | | |
Net income | $ | 66,127 | | | $ | 64,957 | | | $ | 125,990 | | | $ | 169,859 | |
Income allocated to participating securities | (1,267) | | | (1,013) | | | (2,254) | | | (2,478) | |
Net income available to common shareholders | $ | 64,860 | | | $ | 63,944 | | | $ | 123,736 | | | $ | 167,381 | |
| | | | | | | |
Basic net income per common share | $ | 1.78 | | | $ | 1.67 | | | $ | 3.36 | | | $ | 4.26 | |
| | | | | | | |
Diluted net income per common share: | | | | | | | |
Net income | $ | 66,127 | | | $ | 64,957 | | | $ | 125,990 | | | $ | 169,859 | |
Income allocated to participating securities | (1,267) | | | (1,012) | | | (2,254) | | | (2,477) | |
Net income available to common shareholders | $ | 64,860 | | | $ | 63,945 | | | $ | 123,736 | | | $ | 167,382 | |
| | | | | | | |
Diluted net income per common share | $ | 1.78 | | | $ | 1.67 | | | $ | 3.36 | | | $ | 4.26 | |
| | | | | | | |
Anti-dilutive awards excluded from diluted earnings per share computation(*) | 460,947 | | | 525,349 | | | 483,921 | | | 465,529 |
(*)The volume of anti-dilutive awards is, in part, due to the related unamortized compensation costs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 – OTHER CURRENT LIABILITIES
Other current liabilities at the end of any comparable period, were as follows:
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | September 30, 2023 | | December 31, 2022 | | October 1, 2022 |
Unredeemed gift cards | $ | 23,983 | | | $ | 23,303 | | | $ | 21,217 | |
Accrued employee benefits | 17,433 | | | 16,356 | | | 14,131 | |
Accrued taxes | 13,534 | | | 10,445 | | | 11,190 | |
Accrued bonuses and incentive compensation(*) | 12,184 | | | 7,244 | | | 1,260 | |
Income taxes payable | 6,341 | | | 17,484 | | | 7,911 | |
| | | | | |
Accrued salaries and wages | 6,030 | | | 11,519 | | | 6,113 | |
Accrued other | 26,617 | | | 36,088 | | | 30,572 | |
Other current liabilities | $ | 106,122 | | | $ | 122,439 | | | $ | 92,394 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
(*)Accrual as of December 31, 2022 and October 1, 2022 was impacted by a lower than expected financial performance in fiscal 2022.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and pending or threatened lawsuits in the normal course of business. The Company is not currently a party to any legal proceedings that it believes would have a material adverse impact on its financial position, results of operations, or cash flows.
The Company’s contractual obligations and commitments include obligations associated with leases, the secured revolving credit agreement, senior notes, and employee benefit plans.
NOTE 13 – SEGMENT INFORMATION
The table below presents certain information for the Company’s reportable segments and unallocated corporate expenses for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal quarter ended | | Three fiscal quarters ended |
(dollars in thousands) | September 30, 2023 | | % of consolidated net sales | | October 1, 2022 | | % of consolidated net sales | | September 30, 2023 | | % of consolidated net sales | | October 1, 2022 | | % of consolidated net sales |
Net sales: | | | | | | | | | | | | | | | |
U.S. Retail | $ | 374,796 | | | 47.3 | % | | $ | 408,209 | | | 49.9 | % | | $ | 1,021,983 | | | 49.0 | % | | $ | 1,153,664 | | | 50.1 | % |
U.S. Wholesale | 300,338 | | | 38.0 | % | | 288,454 | | | 35.2 | % | | 767,194 | | | 36.7 | % | | 819,772 | | | 35.6 | % |
International | 116,517 | | | 14.7 | % | | 121,961 | | | 14.9 | % | | 298,553 | | | 14.3 | % | | 327,167 | | | 14.3 | % |
Consolidated net sales | $ | 791,651 | | | 100.0 | % | | $ | 818,624 | | | 100.0 | % | | $ | 2,087,730 | | | 100.0 | % | | $ | 2,300,603 | | | 100.0 | % |
| | | | | | | | | | | | | | | |
Operating income: | | | % of segment net sales | | | | % of segment net sales | | | | % of segment net sales | | | | % of segment net sales |
U.S. Retail | $ | 47,983 | | | 12.8 | % | | $ | 57,723 | | | 14.1 | % | | $ | 103,132 | | | 10.1 | % | | $ | 163,257 | | | 14.2 | % |
U.S. Wholesale | 65,702 | | | 21.9 | % | | 39,989 | | | 13.9 | % | | 147,003 | | | 19.2 | % | | 134,088 | | | 16.4 | % |
International | 13,379 | | | 11.5 | % | | 17,113 | | | 14.0 | % | | 23,193 | | | 7.8 | % | | 39,665 | | | 12.1 | % |
Corporate expenses(*) | (33,634) | | | n/a | | (23,242) | | | n/a | | (85,983) | | | n/a | | (67,385) | | | n/a |
Consolidated operating income | $ | 93,430 | | | 11.8 | % | | $ | 91,583 | | | 11.2 | % | | $ | 187,345 | | | 9.0 | % | | $ | 269,625 | | | 11.7 | % |
(*)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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Fiscal quarter ended September 30, 2023 | | Three fiscal quarters ended September 30, 2023 |
Charges: | U.S. Retail | | U.S. Wholesale | | International | | U.S. Retail | | U.S. Wholesale | | International |
| | | | | | | | | | | |
Organizational restructuring(*) | $ | 0.6 | | | $ | 0.4 | | | $ | 0.3 | | | $ | — | | | $ | 0.1 | | | $ | 0.3 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(*)Relates to charges for organizational restructuring and related corporate office lease amendment actions. Additionally, the third fiscal quarter and first three fiscal quarters ended September 30, 2023 includes a corporate charge of $1.5 million and $4.1 million, respectively, related to organizational restructuring and related corporate office lease amendment actions.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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; changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits; continued inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue, to affect freight, transit, and other costs; risks related to geopolitical conflict, including ongoing geopolitical challenges between the United States and China, the ongoing hostilities in Ukraine and Israel, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience; risks related to a shutdown of the U.S. government; 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 and our failure to manage our inventory; 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; fluctuations in foreign currency exchange rates; risks associated with corporate responsibility issues; 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.
OVERVIEW
We are the largest branded marketer of young children’s apparel in North America. We own two of the most highly recognized and trusted brand names in the children’s apparel market, Carter’s and OshKosh B’gosh (or “OshKosh”). We also own Skip Hop, a leading young children’s lifestyle brand, exclusive Carter’s brands developed for specific wholesale customers, and Little Planet, a brand focused on organic fabrics and sustainable materials.
Established in 1865, our Carter’s brand is recognized and trusted by consumers for high-quality apparel and accessories for children in sizes newborn to 14.
Established in 1895, OshKosh is a well-known brand, trusted by consumers for high-quality apparel and accessories for children in sizes newborn to 14, with a focus on playclothes for toddlers and young children. We acquired OshKosh in 2005.
Established in 2003, the Skip Hop brand rethinks, reenergizes, and reimagines durable necessities to create higher value, superior quality, and top-performing products for parents, babies, and toddlers. We acquired Skip Hop in 2017.
Additionally, Child of Mine, an exclusive Carter’s brand, is sold at Walmart; Just One You, an exclusive Carter’s brand, is sold at Target, and Simple Joys, an exclusive Carter’s brand, is available on Amazon.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Launched in 2021, the Little Planet brand focuses on sustainable clothing through the sourcing of mostly organic cotton as certified under the Global Organic Textile Standard (“GOTS”), a global textile processing standard for organic fibers. This brand includes a wide assortment of baby and toddler apparel, accessories, and sleepwear.
Our mission is to serve the needs of all families with young children, with a vision to be the world’s favorite brands in young children’s apparel and related products. We believe our brands are complementary to one another in product offering and aesthetic. Each brand is uniquely positioned in the marketplace and offers great value to families with young children. Our multi-channel, global business model, which includes retail stores, eCommerce, and wholesale distribution capabilities, as well as omni-channel capabilities in the United States and Canada, enables us to reach a broad range of consumers around the world. As of September 30, 2023, our channels included 1,009 company-owned retail stores, approximately 19,350 wholesale locations, and eCommerce sites in North America, as well as our international wholesale accounts and licensees which operate in over 90 countries.
The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Form 10-Q and audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the 2022 fiscal year ended December 31, 2022.
Segments
Our three business segments are: U.S. Retail, U.S. Wholesale, and International. These segments are our operating and reporting segments. Our U.S. Retail segment consists of revenue primarily from sales of products in the United States through our retail stores and eCommerce websites. Similarly, our U.S. Wholesale segment consists of revenue primarily from sales in the United States of products to our wholesale partners. Our International segment consists of revenue primarily from sales of products outside the United States, largely through our retail stores and eCommerce websites in Canada and Mexico, and sales to our international wholesale customers and licensees.
Gross Profit and Gross Margin
Gross profit is calculated as consolidated net sales less cost of goods sold. Gross margin is calculated as gross profit divided by consolidated net sales. Cost of goods sold includes expenses related to the merchandising, design, and procurement of product, including inbound freight costs, purchasing and receiving costs, and inspection costs. Also included in costs of goods sold are the costs of shipping eCommerce products to end consumers. Retail store occupancy costs, distribution expenses, and generally all other expenses other than interest and income taxes are included in Selling, general, and administrative (“SG&A”) expenses. Distribution expenses that are included in SG&A primarily consist of payments to third-party shippers and handling costs to process product through our distribution facilities, including eCommerce fulfillment costs, and delivery to our wholesale customers and to our retail stores. Our gross profit and gross margin may not be comparable to other entities that define their metrics differently.
Recent Developments
Macroeconomic Factors, Consumer Demand, and Inventories
Macroeconomic factors, including inflationary pressures, increased interest rates, the lapping of government stimulus, increased consumer debt levels, decreased savings rates, resumption of student loan repayments, geopolitical unrest, and increased risks of a recession continued to create a complex and challenging environment for our business in the third quarter of fiscal 2023. We believe these macroeconomic factors have resulted in lower consumer sentiment and negatively impacted demand for our products and will likely continue to negatively impact demand in the remainder of fiscal 2023.
Compared to the end of the third quarter of fiscal 2022, our inventories decreased $278.7 million, or 31.0%, to $620.7 million, primarily due to decreased in-transit inventory, decreased “pack and hold” inventory, and lower forecasted net sales for fiscal 2023. “Pack and hold” inventory decreased $58.4 million, or 56.8%, to $44.5 million. Inventory levels were elevated throughout much of the retail industry during the first half of fiscal 2023, resulting in an increase in promotional activity as companies sell off their excess inventories. We have taken action to align inventory with planned demand, including selectively utilizing a pack and hold strategy to sell through inventory profitably in later periods, and selling through excess inventory in our own retail channels and in off-price channels. Inventory levels for the fourth quarter of fiscal 2023 are also expected to be lower than those in fiscal 2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Inflationary Pressures
In fiscal 2022, the cost of transportation, particularly ocean freight rates, raw materials, packaging materials, labor, energy, fuel, and other inputs necessary for the production and distribution of our products rapidly increased. We continued to experience inflationary pressures on many input costs through the end of the third quarter of fiscal 2023. While freight input costs have decreased during fiscal 2023, we may continue to experience inflationary pressures on other input costs and distribution costs for the remainder of fiscal 2023. We have offset some of these cost pressures through increases in the selling prices of some of our products, product cost optimization, increasing and diversifying our portfolio of suppliers, renegotiating our longer-term shipping container contracts, and reductions in discretionary spending. However, our pricing actions could have an adverse impact on demand and may not be sufficient to cover all increased costs that we may experience.
Organizational Restructuring and Corporate Office Lease Amendment
During the first quarter and third quarter of fiscal 2023, we initiated several organizational restructuring initiatives which included a reorganization of staffing models across multiple functions to drive labor savings and increase efficiencies. In conjunction with these plans, we incurred approximately $2.9 million and $6.2 million in costs in the third quarter and the first three quarters of fiscal 2023, respectively. These costs were primarily related to severance and other termination benefits and are included in Other current liabilities in the accompanying unaudited condensed consolidated balance sheet.
Additionally, during the first quarter of fiscal 2023, we executed an amendment to the lease of our corporate headquarters in Atlanta, Georgia which resulted in returning three floors to the landlord and extending the lease to 2035. As a result of the reduction in leased office space, we recorded a net gain of $1.8 million related to the partial termination of the lease in the first quarter of fiscal 2023.
Third Fiscal Quarter 2023 Financial Highlights
The strength of our product offerings, leaner inventory position, lower ocean freight rates, and focus on expense management enabled us to improve profitability and grow earnings despite the challenging macroeconomic environment that weighed on consumer demand. However, sales declined compared to the third quarter of fiscal 2022, which we believe reflects the significant ongoing and negative impact of high inflation on consumer demand for our products and reduced spending more broadly across the retail industry. Although demand from our wholesale customers increased in the third quarter of fiscal 2023, wholesale customers continue to take a cautious approach to their future inventory commitments.
Despite these macroeconomic challenges, including the negative impacts of high inflation on aspects of our cost structure, operating margin increased compared to the third quarter of fiscal 2022. We also increased our store count and continued to return capital to our shareholders in the third quarter of fiscal 2023.
Unless otherwise stated, comparisons are to the third quarter of fiscal 2022:
•Consolidated net sales decreased $27.0 million, or 3.3%, to $791.7 million, primarily due to macroeconomic factors, including inflationary pressures, increased interest rates, increased consumer debt levels, decreased savings rates, and risk of recession, driving lower consumer demand.
•Despite increased pressure on pricing from our competitors, operating income increased $1.8 million, or 2.0%, to $93.4 million, and operating margin increased 60 basis points (“bps”) to 11.8% primarily due to decreased ocean freight rates, decreased inventory provisions, and improved price realization, partially offset by fixed cost deleverage on decreased sales.
•We believe that our growth in years ahead will be driven by our exclusive Carter’s brands in the wholesale channel and new store openings. Given our progress with improved price realization, more attractive store opening opportunities in the United States continue to be available to us. During the third quarter of fiscal 2023, we opened 6 stores and closed 1 store in the United States. We are projecting approximately 25 store openings in the United States in the remainder of fiscal 2023.
•As a result of our strong financial position and available liquidity, we returned $55.4 million to our shareholders, comprised of $27.6 million in share repurchases and $27.9 million in cash dividends. For the first three quarters of fiscal 2023, we returned $152.0 million to our shareholders, comprised of $67.5 million in share repurchases and $84.5 million in cash dividends.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
THIRD FISCAL QUARTER ENDED SEPTEMBER 30, 2023 COMPARED TO THIRD FISCAL QUARTER ENDED OCTOBER 1, 2022
The following table summarizes our results of operations. All percentages shown in the below table and the discussion that follows have been calculated using unrounded numbers.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal quarter ended | |
(dollars in thousands, except per share data) | September 30, 2023 | | October 1, 2022 | | $ Change | | % / bps Change |
Net sales | $ | 791,651 | | | $ | 818,624 | | | $ | (26,973) | | | (3.3) | % |
Cost of goods sold | 415,254 | | | 448,096 | | | (32,842) | | | (7.3) | % |
| | | | | | | |
Gross profit | 376,397 | | | 370,528 | | | 5,869 | | | 1.6 | % |
Gross profit as % of net sales | 47.5 | % | | 45.3 | % | | | | 220 bps |
Royalty income, net | 5,713 | | | 7,273 | | | (1,560) | | | (21.4) | % |
Royalty income as % of net sales | 0.7 | % | | 0.9 | % | | | | (20) bps |
Selling, general, and administrative expenses | 288,680 | | | 286,218 | | | 2,462 | | | 0.9 | % |
SG&A expenses as % of net sales | 36.5 | % | | 35.0 | % | | | | 150 bps |
| | | | | | | |
| | | | | | | |
Operating income | 93,430 | | | 91,583 | | | 1,847 | | | 2.0 | % |
Operating income as % of net sales | 11.8 | % | | 11.2 | % | | | | 60 bps |
Interest expense | 8,615 | | | 9,712 | | | (1,097) | | | (11.3) | % |
Interest income | (1,064) | | | (257) | | | (807) | | | >100% |
Other income, net | 507 | | | 1,270 | | | (763) | | | (60.1) | % |
| | | | | | | |
Income before income taxes | 85,372 | | | 80,858 | | | 4,514 | | | 5.6 | % |
Income tax provision | 19,245 | | | 15,901 | | | 3,344 | | | 21.0 | % |
Effective tax rate(*) | 22.5 | % | | 19.7 | % | | | | 280 bps |
Net income | $ | 66,127 | | | $ | 64,957 | | | $ | 1,170 | | | 1.8 | % |
| | | | | | | |
Basic net income per common share | $ | 1.78 | |