Carter’s, Inc. — Form 10-Q Summary
Period: Fiscal quarter and first two fiscal quarters ended July 3, 2021, compared primarily with periods ended June 27, 2020. The request metadata says “2020 Q2,” but the filing itself reports 2021 Q2.
Business context
Carter’s designs, sources, and markets childrenswear and related products under Carter’s, OshKosh, Skip Hop, and other brands. It sells through U.S. retail and eCommerce, wholesale, and international channels. The company operated 1,003 North American stores at quarter-end.
Financial performance
| Metric | Q2 2021 | First two quarters 2021 |
|---|---|---|
| Net sales | $746.4 million; up 45.0% | $1.534 billion; up 31.2% |
| Gross profit / margin | $368.7 million / 49.4% | $760.7 million / 49.6% |
| Operating income (loss) / margin | $107.6 million / 14.4% | $235.1 million / 15.3% |
| Net income (loss) | $71.6 million | $157.8 million |
| Diluted EPS | $1.62 | $3.58 |
For the first two quarters, operating cash flow was $49.5 million, down from $237.4 million a year earlier. Investing cash outflow was $15.5 million; financing cash outflow was $16.4 million. Cash increased $18.6 million from fiscal year-end to $1.121 billion.
At July 3, 2021, total debt was $1.0 billion principal ($990.4 million net of issuance costs), consisting of two $500 million senior note issues due 2025 and 2027. There were no revolver borrowings; $745.6 million remained available, with $4.4 million of letters of credit outstanding. Cash plus revolver availability was approximately $1.87 billion. Operating lease liabilities totaled $643.2 million. Current assets were $1.971 billion and current liabilities $628.3 million.
Changes and segment results
- Q2 sales growth reflected more stores open than in the COVID-19-affected prior-year quarter, recovering wholesale demand, higher average selling prices, and expanded omnichannel programs. Management also cited vaccinations, easing restrictions, pandemic relief, and back-to-school demand. The prior-year comparison was unusually weak due to store closures and business disruption.
- Q2 gross margin rose 370 basis points to 49.4%; first-half margin rose 990 basis points to 49.6%. Higher sales, pricing, fewer promotions, and lower product costs contributed. First-half 2020 included $41.8 million of incremental inventory-related charges.
- Q2 sales increased across U.S. Retail (+34.1%), U.S. Wholesale (+52.6%), and International (+93.4%). International sales benefited by approximately $8.0 million from currency translation; first-half consolidated sales benefited by approximately $11.2 million.
- First-half 2021 operating income improved from a $57.5 million loss to $235.1 million income. The prior period included $17.7 million goodwill impairment and $26.5 million intangible impairment, as well as significant COVID-related disruption.
- Q2 SG&A rose 22.7% in dollars but declined to 35.9% of sales from 42.4%, reflecting sales leverage and lower prior-year restructuring, pandemic, and lease impairment costs. Performance-based compensation and productivity costs increased.
Outlook, risks, and unusual items
- No specific full-year sales or earnings guidance is provided. Management expects approximately $50 million of fiscal 2021 capital expenditures, mainly for technology, stores, omnichannel, and distribution facilities.
- Management expects to close approximately 25 additional stores in the second half of fiscal 2021, following approximately 90 U.S. closures in the first half, as part of a plan to close over 100 stores by year-end.
- Supply-chain delays and higher inbound freight costs could adversely affect second-half results. The company expects to spend more to expedite shipments from Asia and expects higher performance-based compensation costs than in the second half of 2020.
- Operating cash flow was lower year over year despite higher earnings, primarily due to reduced vendor payment terms and payment of deferred fiscal 2020 store rent. Inventory was $619.6 million, with management citing lean inventory strategy and supply delays alongside increased demand.
- A credit-facility amendment requires minimum monthly liquidity of $950 million through delivery of third-quarter 2021 financial statements. Additional dividends and repurchases are permitted up to $250 million subject to conditions and liquidity compliance. The company reported covenant compliance at quarter-end.
- The company paid a $0.40-per-share dividend in Q2 after suspending dividends in 2020; future dividends and any resumption of open-market buybacks remain subject to board decisions, credit-facility limits, and business conditions. No open-market repurchases occurred in the first half of 2021.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. The filing states that results for the quarter are not necessarily indicative of full-year results and notes seasonal fluctuations.
Key facts for investors to verify
- Confirm the intended reporting period: this filing covers Q2 2021, not Q2 2020.
- Assess whether sales and margin strength persists beyond comparisons against COVID-disrupted 2020 periods, and monitor comparable-sales data when management considers it meaningful.
- Track supply-chain delays, expedited freight costs, inventory availability, and their effects on margins and second-half performance.
- Monitor operating cash flow and working-capital movements, particularly vendor payment terms, rent payments, and inventory.
- Review the $950 million minimum-liquidity covenant, revolver availability, debt service, and restrictions on dividends or share repurchases.