Carter’s, Inc. — Form 10-Q Summary
Reporting-period note: The request metadata says “2020 Q3,” but this filing covers the fiscal quarter ended October 2, 2021, and the first three fiscal quarters of fiscal 2021. Comparative periods ended September 26, 2020.
Business context
Carter’s designs, sources, and markets children’s apparel and products through U.S. Retail, U.S. Wholesale, and International segments. Its channels include retail stores, eCommerce, wholesale, and licensing. It operated 984 stores in North America at quarter-end.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2021 | Q3 2020 | First 3 quarters 2021 | First 3 quarters 2020 |
|---|---|---|---|---|
| Net sales | $890.6 | $865.1 | $2,424.3 | $2,034.4 |
| Gross profit / margin | $408.8 / 45.9% | $383.7 / 44.4% | $1,169.4 / 48.2% | $847.5 / 41.7% |
| Operating income / margin | $124.0 / 13.9% | $113.5 / 13.1% | $359.1 / 14.8% | $56.0 / 2.8% |
| Net income | $85.0 | $81.2 | $242.8 | $10.7 |
| Diluted EPS | $1.93 | $1.85 | $5.51 | $0.24 |
| Operating cash flow | Not presented separately for the quarter | $7.3 | $318.7 |
Q3 sales rose 2.9% year over year; gross margin improved 150 basis points and operating margin improved 80 basis points. For the first three quarters, sales rose 19.2%, gross margin expanded 650 basis points, and operating margin expanded 1,200 basis points. The year-to-date comparison reflects 2020 pandemic disruptions and impairment charges that did not recur in 2021, as well as the 2021 recovery in demand.
Balance sheet, cash flow, and capital
- At October 2, 2021, cash and cash equivalents were $943.0 million; current assets were $1,982.8 million and current liabilities were $674.5 million.
- Finished-goods inventory was $722.4 million, up 11.7% from September 2020, mainly due to delayed production and transportation and increased in-transit inventory. Accounts payable was $388.7 million, down 17.9% year over year; management cited payment timing and changes to certain vendor terms.
- Operating cash flow was only $7.3 million for the first three quarters, down from $318.7 million. Management attributed the decline primarily to shorter vendor payment terms and payment of deferred retail-store rent, partly offset by higher profitability. Capital expenditures were $28.7 million; management planned approximately $45 million for fiscal 2021.
- Long-term debt, net, was $990.9 million, comprising $1.0 billion of senior notes before issuance costs: $500 million at 5.50% due 2025 and $500 million at 5.625% due 2027. No revolving-credit borrowings were outstanding; approximately $745.6 million was available, excluding $4.4 million of letters of credit.
- Operating lease liabilities totaled approximately $618.0 million. The company reported compliance with its revolving-credit covenants. The facility amendment required minimum monthly liquidity of $950 million through delivery of the third-quarter financial statements and conditioned certain dividends and repurchases on liquidity and no default.
- The company repurchased 1.10 million shares for $110.3 million in Q3 and paid $0.40 per share in dividends in each of Q2 and Q3. It reported $540.2 million of remaining repurchase authorization at quarter-end.
Material changes and management commentary
- Q3 U.S. Retail sales increased 3.7%, while U.S. Wholesale sales declined 2.6% and segment operating income fell 39.0%. International sales increased 14.9%, with a $5.6 million favorable currency-translation effect.
- Management attributed demand gains to increased store traffic, reduced promotions and higher average selling prices, recovery among international wholesale partners, and expanded omni-channel programs. U.S. Wholesale sales were constrained by supply-chain and transportation delays.
- Higher inbound freight costs and delays affected results. Air freight costs were $15.7 million in Q3 and $25.6 million year to date, primarily related to U.S. Wholesale.
- Management expected pandemic-related production and transportation delays, along with higher costs to expedite shipments from Asia, to adversely affect fourth-quarter fiscal 2021 results. No specific fourth-quarter revenue or earnings guidance is provided in the filing.
- The company closed approximately 110 U.S. stores in the first three quarters and expected to close approximately five more by fiscal year-end, completing its plan to close more than 100 stores, primarily less-profitable or lower-traffic locations.
- Fiscal 2020 year-to-date results included $17.7 million of goodwill impairment and $26.5 million of intangible-asset impairment; these did not recur in 2021. In 2021, the company released $8.4 million of prior adverse purchase-commitment reserves; no COVID-related adverse fabric commitment reserve remained at quarter-end.
Risks, contingencies, and other disclosures
- Supply-chain delays, freight expense, product availability, and vendor payment terms are key near-term risks. The filing also identifies foreign-currency exposure; management says it cannot quantify the potential effect of future currency fluctuations.
- Seasonality typically results in lower sales and gross profit in the first half of the fiscal year, so interim results may not predict full-year performance.
- The company reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective, with no material change in internal control reported for the quarter.
- Management expected approximately $0.5 million of additional restructuring-related severance charges through fiscal 2021. Recorded restructuring reserves for severance and termination benefits were approximately $1.4 million at quarter-end.
Investor verification priorities
- Check subsequent results for the expected fourth-quarter impact of supply-chain delays, air freight, and other inbound transportation costs.
- Assess working-capital and cash-conversion trends, particularly inventory growth, vendor payment terms, and operating cash flow relative to reported earnings.
- Review segment profitability, especially the Q3 decline in U.S. Wholesale operating income and margin.
- Confirm liquidity-covenant status and the effect of credit-facility restrictions on future dividends and share repurchases.
- Distinguish year-over-year operating improvement from the unusually weak 2020 comparison, which included pandemic-related disruption and impairment charges.