Carter’s, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended January 1, 2022 (52 weeks), compared primarily with fiscal 2020 ended January 2, 2021 (53 weeks). The filing is an annual report for FY2021, not a standalone 2020 Q4 report; FY2020’s extra week contributed about $32.1 million in revenue. Carter’s designs, sources, and sells children’s apparel and related products through U.S. Retail, U.S. Wholesale, and International segments.
Key financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $3.486 billion | $3.024 billion |
| Gross profit / margin | $1.662 billion / 47.7% | $1.313 billion / 43.4% |
| Operating income / margin | $497.1 million / 14.3% | $189.9 million / 6.3% |
| Net income | $339.7 million | $109.7 million |
| Diluted EPS | $7.81 | $2.50 |
| Operating cash flow | $268.3 million | $588.5 million |
Sales rose 15.3%; gross profit increased 26.6%. SG&A was $1.194 billion, or 34.2% of sales, down from 36.6%. The effective tax rate increased to 22.5% from 18.7%. FY2021 results benefited from stronger sales and pricing, improved margins, and the absence of $44.2 million of goodwill and intangible-asset impairment charges recorded in FY2020. Against pre-pandemic FY2019, sales were down 0.9%, while operating income was up 33.7%.
By segment, sales increased 13.6% in U.S. Retail to $1.899 billion, 13.1% in U.S. Wholesale to $1.126 billion, and 29.2% in International to $460.8 million. Segment operating margins were 19.4%, 17.3%, and 13.8%, respectively.
Liquidity, debt, and capital allocation
Cash and cash equivalents were $984.3 million at year-end, down from $1.102 billion. Long-term debt was $1.00 billion principal, comprising $500 million of 5.500% notes due 2025 and $500 million of 5.625% notes due 2027. The $750 million revolving facility had no borrowings and approximately $745.9 million available; it matures in September 2023. The company reported covenant compliance. Operating cash flow declined $320.2 million, primarily because vendor payment terms shortened; inventories increased 8.1% to $647.7 million and accounts payable fell 13.8% to $407.0 million.
Capital expenditures were $37.4 million in FY2021; management planned approximately $65 million for FY2022. The company returned $359.5 million to shareholders in FY2021 through $299.3 million of repurchases and $60.1 million of dividends. Subsequent to year-end, the board authorized up to $1.0 billion in repurchases and a $0.75 quarterly dividend. Management intended to redeem the $500 million 5.500% notes in FY2022 using cash, estimating an approximately $21 million extinguishment loss, including premium, fees, and unamortized issuance costs.
Changes, outlook, and risks
- Management attributed sales growth to store traffic recovery, fewer promotions and higher average selling prices, strong wholesale demand, Canadian growth, international partner recovery, and pandemic relief measures. U.S. eCommerce sales declined as customers returned to stores.
- Gross margin improved despite $33.6 million of inbound air freight costs. Management expected supply-chain delays, elevated freight and input costs, and inflationary pressures to continue into FY2022; planned price increases may not fully offset costs and could reduce demand.
- The company closed 110 U.S. stores in FY2021, primarily less-profitable locations, and expected to close about 30 more in FY2022. It also described plans for U.S. net store growth during FY2022 and over the following five years.
- Pack-and-hold inventory decreased almost 50% year over year, but some late-arriving goods were held for future periods. Total inventory nevertheless increased amid demand growth and shipment delays.
- Key risks include COVID-19 and renewed disruptions, concentrated sourcing and fabric supply in Asia/China, transportation and distribution constraints, rising labor and product costs, wholesale customer and receivables concentration, consumer demand and birth-rate trends, competition, weather, foreign exchange, and cybersecurity. Ten vendors supplied about 54% of FY2021 product; about 80% of fabric was sourced from China.
- The company reported no legal proceeding it believed would materially adversely affect its financial position, results, or cash flows. The independent auditor gave an unqualified opinion on the financial statements and internal controls; U.S. wholesale revenue recognition was identified as a critical audit matter.
Important facts for investors to verify
- Assess whether FY2021’s margin recovery and pricing gains can persist after accounting for the 53-week FY2020 comparison, prior-year impairments, and pandemic-related demand shifts.
- Monitor FY2022 freight, sourcing, labor, and inflation costs, price realization, inventory levels, and the effect of late-arriving pack-and-hold goods.
- Evaluate cash generation and working-capital trends, including vendor payment terms, wholesale receivables concentration, and the planned capital spending.
- Review the economics and funding of the announced note redemption, expanded repurchase authorization, dividend, and store-growth plans, including applicable credit-facility restrictions.
- Track store and eCommerce performance, the planned store closures and openings, and whether international growth is sustained.