Carter’s, Inc. — Form 10-Q Summary
Business context and reporting period. Carter’s designs, sources, and markets children’s apparel and related products through U.S. and international retail, eCommerce, wholesale, and licensing channels. This filing covers the fiscal quarter ended April 3, 2021 (first quarter of fiscal 2021); the comparable quarter ended March 28, 2020. The filing’s performance comparison is materially affected by COVID-19 disruptions, including store closures in March 2020.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $787.4 million | $654.5 million |
| Gross profit / margin | $392.0 million / 49.8% | $228.3 million / 34.9% |
| Operating income (loss) / margin | $127.5 million / 16.2% | $(78.5) million / (12.0)% |
| Net income (loss) | $86.2 million | $(78.7) million |
| Diluted EPS | $1.96 | $(1.82) |
| Cash used in operating activities | $39.5 million | $14.3 million |
| Capital expenditures | $11.7 million | $8.1 million |
Net sales increased 20.3%. Sales grew across all segments: U.S. Retail 26.9%, U.S. Wholesale 12.4%, and International 18.7%. U.S. eCommerce sales rose 38.0%; Canadian eCommerce sales rose 143.7%. Management attributed growth to stronger online demand, more stores being open, wholesale recovery, higher average selling prices, and strong Spring product demand. The filing says demand improved meaningfully after pandemic relief legislation passed in March 2021.
Gross margin expanded 1,490 basis points, reflecting higher sales and selling prices, lower product costs and excess-inventory provisions, and a $6.3 million benefit from fabric purchase commitments reserved in the prior-year quarter. Q1 2020 included $48.7 million in incremental inventory-related charges, including $22.8 million for adverse inventory and fabric commitments. Q1 2020 also included $44.2 million of goodwill and intangible impairment charges that did not recur. SG&A increased 0.8% to $271.9 million, but fell to 34.5% of sales from 41.2%.
Financial position, liquidity, and capital
- At April 3, 2021, cash and cash equivalents were $1.054 billion; current assets were $1.918 billion and current liabilities were $656.9 million.
- Long-term debt, net of issuance costs, was $990.0 million, comprising $500 million of 5.500% senior notes due 2025 and $500 million of 5.625% senior notes due 2027. No revolving-credit borrowings were outstanding; approximately $745 million remained available, excluding $5 million of letters of credit.
- Cash declined $48.6 million during the quarter, ending at $1.054 billion. Operating cash use reflected vendor-payment timing and payment of deferred store rents, partly offset by higher sales. Management expected these factors to weigh on fiscal 2021 operating cash flow.
- Inventory was $560.7 million, compared with $565.9 million a year earlier. Accounts receivable was $240.2 million and accounts payable was $334.8 million.
- Operating lease liabilities totaled $690.0 million on a present-value basis. These are separate from reported debt.
- Capital expenditures were $11.7 million in the quarter; management planned approximately $50 million for fiscal 2021.
Material changes, outlook, and risks
- On April 21, 2021, after quarter-end, the revolving-credit amendment raised the minimum monthly liquidity requirement during the restricted period through delivery of Q3 2021 financial statements to $950 million. It also permitted up to $250 million in additional restricted payments, including dividends and repurchases, subject to conditions and the liquidity requirement.
- The Board authorized a $0.40-per-share quarterly dividend on April 27, payable May 28, 2021. No dividend was declared or paid in Q1 2021; the prior-year quarter paid $0.60 per share. The share-repurchase program remained suspended, although authorization capacity was approximately $650.4 million.
- The company planned to close more than 100 stores by fiscal year-end 2021 and closed more than 60 in Q1. Approximately 100 Canadian stores were temporarily closed in April 2021 due to local COVID-19 restrictions; management expected most to reopen by mid-May, subject to conditions.
- Management provided no specific full-year earnings guidance in the supplied filing text. It cautioned that Q1 results may not indicate full-year results, noting seasonal sales patterns and continuing uncertainty from COVID-19. Fiscal 2021 restructuring charges were expected to be approximately $1.0–$1.5 million more.
- Key risks include ongoing pandemic effects, store closures and changing restrictions, demand and consumer trends, vendor payment terms and supply commitments, foreign-currency movements, and compliance with credit-facility liquidity and payment restrictions. The company reported no material change to previously disclosed risk factors and no legal proceedings believed likely to materially affect its financial position, results, or cash flows.
- Q1 2021 included $2.1 million of COVID-related costs, primarily protective equipment and cleaning supplies. The company also recorded a $2.6 million increase in stock-based compensation expense after revising performance-target estimates. Gross unrecognized tax benefits were approximately $15.6 million; $2.1 million of related reserves were expected to reach statute-of-limitations expiration within 12 months.
Important facts for investors to verify
- How much of the year-over-year sales and margin recovery reflects durable demand versus comparison with Q1 2020 store closures, impairments, and inventory charges.
- Whether cash generation improves despite vendor-term changes and deferred rent payments, and whether the company maintains the amended $950 million minimum liquidity requirement.
- Progress and costs of planned store closures, including the reopening status of temporarily closed Canadian stores.
- Whether the announced dividend is paid and whether future dividends or repurchases remain permitted under credit-facility restrictions.
- Actual fiscal 2021 capital spending, restructuring costs, and the impact of continuing COVID-19 and foreign-exchange conditions.