Carter’s, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended April 2, 2022; comparisons are with the quarter ended April 3, 2021. The filing is for 2022 Q1, notwithstanding the 2021 Q1 period in the request metadata. Amounts below are in U.S. dollars.
Business context
Carter’s designs, sources, and markets children’s apparel and related products through U.S. retail and eCommerce, wholesale, and international channels. It operated 969 retail stores in North America at quarter-end.
Financial performance and liquidity
- Sales: Net sales were $781.3 million, down 0.8%. U.S. Retail declined 10.0% to $366.4 million; U.S. Wholesale rose 8.4% to $307.3 million; International rose 11.0% to $107.6 million. Net royalty income was $7.5 million.
- Profitability: Gross profit was $355.0 million, down 9.4%; gross margin fell 440 basis points to 45.4%. SG&A was $259.9 million, or 33.3% of sales versus 34.5%. Operating income was $102.6 million, down 19.5%, with a 13.1% operating margin versus 16.2%. Net income was $67.9 million versus $86.2 million; diluted EPS was $1.66 versus $1.96.
- Cash flow: Operating cash use was $163.8 million versus $39.5 million. Investing cash use was $7.7 million; financing cash use was $111.5 million, including $74.5 million of repurchases and $30.6 million of dividends. Cash decreased by $282.0 million to $702.3 million.
- Balance sheet and debt: Inventory was $679.7 million, up 21.2% year over year. Debt was $1.0 billion gross at quarter-end, including $500 million of 5.50% notes due 2025 and $500 million of 5.625% notes due 2027. The 2025 notes were classified as current following the redemption commitment. No revolver borrowings were outstanding at quarter-end; approximately $745.9 million was available, excluding the effect of the subsequent facility amendment. Total current assets were $1.712 billion and current liabilities were $1.038 billion.
- Capital spending: First-quarter capital expenditures were $7.7 million. Management planned approximately $65 million for fiscal 2022.
Material changes and drivers
- Sales were nearly flat overall, as U.S. Wholesale and International growth was offset by lower U.S. Retail sales. Management cited weaker domestic store traffic and eCommerce sales, persistent winter weather, fewer stores, the later Easter holiday, and the absence of prior-year pandemic relief payments.
- Lower gross margin primarily reflected higher inbound transportation costs and unfavorable customer and channel mix; late-arriving product led to more off-price sales. Increased product costs were generally offset by higher average selling prices.
- Operating income fell across U.S. Retail and U.S. Wholesale, while International operating income increased. Lower performance-based compensation and corporate expenses partially offset margin pressure.
- Operating cash use worsened mainly because of lower vendor payment terms, early inventory receipts, and payment of fiscal 2021 performance compensation.
Outlook, risks, and subsequent events
- Management expected supply-chain and transportation delays, related mitigation costs, and inflation in materials, labor, energy, and freight to continue to pressure fiscal 2022 results. Pricing, product-cost optimization, supplier diversification, shipping contracts, and other cost controls were intended to mitigate these pressures, but may not fully offset them and could affect demand.
- Management said available cash, operating cash flow, and revolver capacity were expected to fund requirements for at least the next 12 months. No specific full-year earnings or sales guidance is provided in the supplied filing text.
- Management expected to open approximately 10 U.S. stores in fiscal 2022 and 100 or more over five years, net of closures. First-half results may not indicate full-year performance because of seasonality.
- On April 4, 2022, the company redeemed $500 million of 5.50% notes using cash on hand. It estimated a second-quarter loss on extinguishment of approximately $19.9 million; the redemption is expected to reduce annual cash interest expense by $27.5 million through May 2025.
- On April 11, 2022, the revolver was amended to increase capacity to $850 million, extend maturity to April 2027, and reduce financial maintenance covenants from two to one. In April, the company also borrowed $50 million on the revolver to support working capital.
- The company reported compliance with credit-facility covenants at quarter-end and no legal proceedings it believed would materially affect its financial position, results, or cash flows. It reported no material changes to previously disclosed risk factors.
Most important facts to verify
- Whether transportation delays, freight and input-cost inflation, and product mix continue to weigh on gross margin and fiscal 2022 results.
- Whether elevated inventory converts to sales as expected, and how working-capital needs affect cash and revolver borrowing.
- The cash and liquidity effects of the April note redemption, the estimated $19.9 million extinguishment loss, and the subsequent $50 million revolver borrowing.
- Whether pricing and cost-mitigation actions offset inflation without materially reducing demand.
- Future share repurchases and dividends, which remain subject to business conditions, credit-facility restrictions, and other factors.