Carter’s, Inc. — Form 10-Q Summary
Reporting period: The filing covers the fiscal quarter ended September 30, 2023, and the first three fiscal quarters of fiscal 2023. This differs from the request metadata’s “2022 Q3.” Comparisons below are to the quarter ended October 1, 2022 and the corresponding prior-year three-quarter period. Amounts are in U.S. dollars.
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. At quarter-end, it operated 1,009 company-owned stores and sold through wholesale locations and eCommerce channels.
| Metric | Q3 2023 | Change vs. Q3 2022 | First three quarters 2023 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $791.7 million | Down 3.3% | $2,087.7 million | Down 9.3% |
| Gross profit / margin | $376.4 million / 47.5% | Profit up 1.6%; margin up 220 bps | $977.8 million / 46.8% | Profit down 7.5%; margin up 90 bps |
| Operating income / margin | $93.4 million / 11.8% | Up 2.0%; margin up 60 bps | $187.3 million / 9.0% | Down 30.5%; margin down 270 bps |
| Net income | $66.1 million | Up 1.8% | $126.0 million | Down 25.8% |
| Diluted EPS | $1.78 | Up from $1.67 | $3.36 | Down from $4.26 |
Cash flow, balance sheet, and capital returns
- Operating cash flow was $205.8 million for the first three quarters, versus cash used of $217.5 million in the prior-year period. The improvement primarily reflected inventory reduction and other favorable working-capital changes, partly offset by lower net income.
- Capital expenditures were $42.5 million; the company planned approximately $65 million of fiscal 2023 capital expenditures, primarily for stores, distribution facilities, and technology.
- Cash and cash equivalents were $169.1 million at September 30, 2023. Inventory was $620.7 million, down 31.0% year over year; management attributed the decrease mainly to lower in-transit and “pack and hold” inventory and a lower sales forecast.
- Total debt, net, was $567.2 million: $500 million principal amount of 5.625% senior notes due March 2027 and $70 million drawn on the revolving facility. The revolver had approximately $775.6 million available, and the company was covenant-compliant. It reported paying off the $70 million revolver balance after quarter-end; as of October 27, borrowings were zero.
- The company paid $0.75 per share in dividends each quarter and repurchased $67.5 million of shares during the first three quarters. Total dividends paid were $84.5 million. Future dividends and repurchases remain subject to business conditions, facility restrictions, and other factors.
Material changes and management commentary
- Q3 sales declined amid inflation, higher interest rates, consumer debt, lower savings, and weaker consumer demand. Units sold fell mid-single digits, partly offset by low-single-digit higher average selling prices.
- Q3 U.S. Retail sales fell 8.2% and comparable sales fell 9.9%; U.S. Wholesale sales rose 4.1%, helped by shipment timing and pricing; International sales fell 4.5%.
- For the first three quarters, sales fell across all segments. U.S. Retail sales declined 11.4%, U.S. Wholesale 6.4%, and International 8.7%. U.S. Retail and International operating income fell, while U.S. Wholesale operating income increased.
- Gross margin improved despite lower sales, primarily due to better price realization, lower inventory provisions, and reduced ocean freight costs. For the first three quarters, higher SG&A as a percentage of sales—reflecting fixed-cost deleverage, compensation, consulting fees, store openings, and restructuring—contributed to lower operating margin.
- Management said lower consumer sentiment and inflationary pressure were expected to continue weighing on demand for the remainder of fiscal 2023. It expected product input and inbound transportation costs, including ocean freight, to decline in Q4 2023 and into fiscal 2024. Wholesale customers remained cautious about future inventory commitments.
Outlook, risks, and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management stated that available cash, operating cash flow, and revolver capacity were expected to meet cash requirements for at least the next 12 months.
- Management planned approximately 25 additional U.S. store openings for the remainder of fiscal 2023. It opened six U.S. stores and closed one in Q3.
- Risks highlighted include weaker discretionary spending, inflation and cost pressures, competition and pricing, inventory execution, supply-chain disruption, foreign currency movements, geopolitical events, customer financial difficulties, and potential limits on dividends or buybacks under the credit facility.
- Fiscal 2023 included $6.2 million of organizational restructuring and related costs through Q3. A corporate-office lease amendment produced a $1.8 million net gain in Q1. The prior-year comparable period included a $19.9 million loss on extinguishment of debt, affecting year-to-date comparisons.
- The company reported no legal proceedings it believed would have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Most important facts for investors to verify
- Confirm the filing period: this is Q3 fiscal 2023, not Q3 2022.
- Track whether demand and comparable sales stabilize, particularly in U.S. Retail, and whether wholesale customers resume replenishment orders.
- Monitor gross-margin durability as freight costs ease and pricing, product costs, promotional activity, and channel mix change.
- Assess whether operating cash flow remains strong after inventory reductions and whether planned capital spending and shareholder returns remain supportable.
- Review debt, interest-rate exposure, covenant limits, and the company’s ability to maintain dividends and share repurchases amid continued macroeconomic uncertainty.