Carter’s, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended April 1, 2023, compared with the quarter ended April 2, 2022. The request metadata says 2022 Q1, but the filing is for Q1 2023.
Business context and financial performance
Carter’s designs and markets children’s apparel and related products through U.S. and international retail, eCommerce, wholesale, and licensing channels. Its brands include Carter’s, OshKosh B’gosh, Skip Hop, and Little Planet.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $695.9 million | $781.3 million | Down 10.9% |
| Gross profit / margin | $309.5 million / 44.5% | $355.0 million / 45.4% | Profit down 12.8%; margin down 90 bps |
| Operating income / margin | $56.4 million / 8.1% | $102.6 million / 13.1% | Income down 45.1%; margin down 500 bps |
| Net income | $36.0 million | $67.9 million | Down 47.0% |
| Diluted EPS | $0.95 | $1.66 | Down $0.71 |
| Operating cash flow | $42.2 million | $(163.8) million | Improved $206.0 million |
| Capital expenditures | $13.8 million | $7.7 million | Increased |
Royalty income, reported separately from net sales, was $6.5 million versus $7.5 million. SG&A was nearly flat at $259.6 million, but rose to 37.3% of sales from 33.3%, reflecting lower sales and fixed-cost deleverage. Interest expense fell to $9.6 million from $15.1 million as average borrowings declined, despite higher market rates.
Segments and key balance-sheet metrics
- U.S. Retail sales fell 11.6% to $323.7 million; segment operating income fell 46.1% to $26.9 million. Comparable sales declined 12.9%.
- U.S. Wholesale sales fell 8.9% to $280.0 million; operating income fell 13.9% to $52.1 million.
- International sales fell 14.4% to $92.2 million; operating income fell 69.9% to $3.1 million. Foreign exchange reduced consolidated sales by about $2.2 million.
- Cash was $157.7 million, versus $211.7 million at year-end 2022 and $702.3 million a year earlier. Inventories were $613.9 million, down 9.7% year over year; accounts payable were $180.2 million.
- Total debt, net, was $576.8 million: $500 million principal of 5.625% senior notes due March 2027 and $80 million drawn on the revolving facility. The revolver had $765.6 million available, excluding outstanding letters of credit; the company reported covenant compliance. It subsequently paid down $60 million on April 19, leaving $20 million outstanding as of April 28.
- Quarterly dividends were $0.75 per share; the company repurchased $9.6 million of shares and paid $28.5 million in dividends.
Material changes, outlook, and risks
Management attributed lower sales to inflation-related pressure on consumer demand and cautious wholesale customer ordering. Units sold declined mid-teens while average selling prices rose mid-single digits. Gross margin remained 44.5%, supported by improved pricing, but was pressured by higher product, transportation, and other costs. Management expects inflation and weaker consumer sentiment to continue weighing on fiscal 2023 results; it expects inbound transportation rates to decline in the second half of 2023 and into 2024. No full-year earnings or revenue guidance is stated in the provided filing text.
Inventory was lower year over year, but pack-and-hold inventory increased 142.4% to $90.9 million. Management plans to align inventory with demand and expects fiscal 2023 inventory levels to be below fiscal 2022 levels. It plans approximately $75 million of fiscal 2023 capital expenditures and, for the remainder of the year, approximately 46 store openings and 7 closures. Seven stores opened and four closed in the quarter.
The company initiated workforce restructuring, incurring approximately $2.9 million of first-quarter costs, primarily severance. A corporate headquarters lease amendment returning three floors and extending the lease to 2035 generated a reported $1.8 million net gain; the cash-flow reconciliation separately shows a $4.4 million gain on partial lease termination before other related effects. Management also cited risks from inflation, consumer spending, supply-chain and input costs, customer financial difficulties, foreign currency, competition, and potential restrictions on dividends or repurchases under the credit facility. It reported no legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether lower consumer demand, mid-teens unit declines, and weaker wholesale orders persist, and how pricing affects demand and gross margin.
- Whether pack-and-hold inventory can be sold profitably and whether inventory reductions and lower freight costs materialize as planned.
- Operating cash flow’s sustainability: the quarter’s improvement was largely attributed to working-capital timing, inventory reductions, and lower incentive-compensation payments.
- Debt and liquidity after the April 19 revolver repayment, including variable-rate exposure; a 100-basis-point rate increase on quarter-end revolver borrowings would add an estimated $0.8 million of annual interest expense.
- Execution and returns from planned store openings and capital spending, and the company’s ability to maintain dividends and repurchases amid operating pressures and credit-facility restrictions.