Carter’s, Inc. — Form 10-Q Summary
Period and metadata: The filing covers the fiscal quarter and first two fiscal quarters ended July 2, 2022, compared primarily with the periods ended July 3, 2021. This differs from the request metadata, which labels the period “2021 Q2.” Financial amounts below are in U.S. dollars; statement amounts are generally in millions unless noted.
Business context and results
Carter’s designs, sources, and markets children’s apparel and related products through U.S. Retail, U.S. Wholesale, and International segments, including retail stores, e-commerce, wholesale partners, and licensing. The company operated 966 stores in North America at quarter-end.
| Metric | Q2 2022 | Q2 2021 | First two quarters 2022 | First two quarters 2021 |
|---|---|---|---|---|
| Net sales | $700.7 | $746.4 | $1,482.0 | $1,533.8 |
| Gross profit / margin | $331.2 / 47.3% | $368.7 / 49.4% | $686.3 / 46.3% | $760.7 / 49.6% |
| Operating income / margin | $75.4 / 10.8% | $107.6 / 14.4% | $178.0 / 12.0% | $235.1 / 15.3% |
| Net income | $37.0 | $71.6 | $104.9 | $157.8 |
| Diluted EPS | $0.93 | $1.62 | $2.59 | $3.58 |
| Operating cash flow | Not stated by quarter in the filing text | $(93.6) | $49.5 |
Q2 SG&A was $261.4 million, or 37.3% of sales, versus $267.8 million and 35.9%. First-half SG&A was $521.3 million, or 35.2% of sales, versus $539.7 million and 35.2%. Q2 and first-half results include lower interest expense but also a $19.9 million loss on extinguishment of debt.
Material changes and drivers
- Q2 sales declined 6.1%; first-half sales declined 3.4%. U.S. Retail was the principal weakness, down 10.5% in Q2 and 10.3% year to date. Comparable U.S. Retail sales fell 8.2% in Q2 and 7.4% in the first half.
- Q2 U.S. Wholesale sales fell 3.3%, while International sales rose 7.1%. First-half U.S. Wholesale and International sales increased 3.2% and 9.1%, respectively.
- Margins contracted: Q2 gross margin fell 210 basis points and operating margin 360 basis points; first-half gross and operating margins each fell 330 basis points. Drivers included higher inbound freight and product costs, inventory and fabric purchase commitment charges, unfavorable mix, and weaker sales leverage. Price increases and reduced promotions partly offset cost pressures.
- Management cited inflation and reduced consumer demand, the absence of prior-year pandemic stimulus benefits, supply-chain and shipping delays, late wholesale shipments, and lower U.S. store count. Foreign exchange reduced sales by approximately $2.3 million in Q2 and $2.5 million in the first half.
Cash, debt, and capital allocation
- Cash and equivalents were $231.3 million at July 2, 2022, down from $984.3 million at January 1, 2022. Inventory was $858.3 million, up 38.5% from July 3, 2021, reflecting early receipts, longer holding periods, higher product costs, and lower-than-projected sales. Management expects elevated inventory to continue through the rest of fiscal 2022.
- First-half operating cash use was $93.6 million, primarily reflecting a $215.5 million inventory build and other working-capital changes. Investing cash use was $16.3 million, including $16.3 million of capital expenditures. Financing cash use was $641.6 million.
- Long-term debt, net, was $616.3 million: $500 million of 5.625% senior notes due 2027 and $120 million drawn on the revolver, net of issuance costs. The company redeemed $500 million of 5.5% notes due 2025 for cash, recording a $19.9 million extinguishment loss; management expects the redemption to reduce annual cash interest by $27.5 million through 2025.
- The amended secured revolver has $850 million of capacity, matures in April 2027, and had approximately $726.4 million available at quarter-end, excluding $3.6 million of letters of credit. The company was in compliance with its covenants. It anticipated further revolver borrowings during the remainder of 2022 to support working capital.
- The company returned $236.8 million to shareholders in the first half through $176.3 million of share repurchases and $60.5 million of dividends. It repurchased 2.1 million shares at an average $85.36 per share; remaining authorization was approximately $872.9 million. Quarterly dividends were $0.75 per share.
Outlook, risks, and contingencies
- Management said liquidity sources should fund projected requirements for at least the next twelve months. It planned approximately $60 million of fiscal 2022 capital expenditures and expected additional revolver borrowing for working capital.
- Management anticipated continued inflation in transportation, raw materials, labor, energy, and other inputs, as well as supply-chain delays and mitigation costs, adversely affecting fiscal 2022 results. Pricing, product-cost optimization, supplier diversification, shipping contracts, and discretionary-spending reductions were intended to offset pressure, but might not fully do so and could affect demand.
- Management described seasonal fluctuations and cautioned that first-half results may not indicate full-year performance. Store plans were approximately 30 U.S. openings and 20 closures in fiscal 2022, with an opportunity for at least 100 net U.S. openings over five years.
- The filing reports ordinary-course claims and lawsuits, but no legal proceeding management believed would materially adversely affect the company. No material changes to previously disclosed risk factors were reported. Unrecognized tax benefits were approximately $11.3 million; $2.8 million of related reserves were expected to reach statute expiration within twelve months.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2022, not Q2 2021.
- Track inventory levels, sell-through, markdowns, and inventory reserves against management’s expectation of elevated inventory through year-end.
- Assess whether pricing and cost actions can offset freight, product-cost, and other inflation without further weakening consumer demand or margins.
- Monitor operating cash flow, working-capital needs, revolver usage, covenant headroom, and the springing maturity condition tied to the 2027 notes.
- Evaluate the effect of repurchases and dividends on liquidity while earnings and operating cash flow have declined.