Carter’s, Inc. — Form 10-K Summary
Period clarification: Although the request identifies “2021 Q4,” the supplied filing is Carter’s fiscal 2022 Form 10-K, covering the 52 weeks ended December 31, 2022. Fiscal 2021 was also 52 weeks, ended January 1, 2022.
Business context
Carter’s designs, sources and sells children’s apparel and related products under Carter’s, OshKosh, Skip Hop and other brands. Its reporting segments are U.S. Retail, U.S. Wholesale and International. At year-end, the company operated 993 stores and sold through wholesale locations and eCommerce channels; its brands were licensed in more than 90 countries.
Financial results
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $3.213 billion | $3.486 billion | Down 7.9% |
| Gross profit / margin | $1.472 billion / 45.8% | $1.662 billion / 47.7% | Margin down 190 bps |
| Operating income / margin | $379.2 million / 11.8% | $497.1 million / 14.3% | Income down 23.7% |
| Net income | $250.0 million | $339.7 million | Down 26.4% |
| Diluted EPS | $6.34 | $7.81 | Down 18.8% |
| Cash from operations | $88.4 million | $268.3 million | Down 67.1% |
Average selling prices per unit rose about 5%, while units sold fell 13%. SG&A was $1.110 billion, or 34.6% of sales, versus 34.2% in FY2021. Interest expense declined to $42.8 million from $60.3 million, but FY2022 included a $19.9 million loss on early debt extinguishment. A $9.0 million non-cash impairment was recorded against the Skip Hop tradename.
By segment, sales were $1.680 billion for U.S. Retail (down 11.5%), $1.080 billion for U.S. Wholesale (down 4.1%) and $452.1 million for International (down 1.9%). Operating income declined in all three segments. U.S. Retail operating margin was 15.0%, U.S. Wholesale 15.0%, and International 12.5%.
Financial position and capital allocation
Year-end cash and cash equivalents were $211.7 million, versus $984.3 million a year earlier. Debt was $620.0 million principal: $500.0 million of 5.625% senior notes due 2027 and $120.0 million drawn on the revolving facility. The $850 million facility had $726.5 million available, and the company reported compliance with its covenants. Operating cash flow was pressured by lower earnings and working-capital needs, including higher inventory and payments of prior-year incentive compensation. Capital expenditures were $40.4 million. The company repurchased $299.7 million of shares and paid $118.1 million in dividends in FY2022.
Inventory increased 14.9% to $744.6 million; pack-and-hold inventory rose to $99.2 million. Management expected inventory to be lower in FY2023 and normalize by year-end. Accounts payable fell 35.1% to $264.1 million. The filing reports total operating lease liabilities of $564.2 million on a present-value basis.
Changes, outlook and principal risks
- Management attributed weaker sales and operating income chiefly to inflation, lower consumer sentiment and demand, and the absence of government stimulus payments received in FY2021. Higher product and transportation costs, excess inventory, and unfavorable mix reduced gross margin.
- Management expected inflationary cost pressures and weak consumer sentiment to continue into FY2023, while anticipating lower inbound transportation rates in the second half of FY2023 and into FY2024. It planned approximately $75 million of FY2023 capital spending and projected about 50 store openings and 10 closures. The filing does not provide a specific sales or earnings forecast.
- In April 2022, the company redeemed $500 million of 5.500% notes due 2025, paying a $19.9 million extinguishment loss; it said the redemption would reduce annual cash interest by $27.5 million through May 2025. The revolver’s maturity was extended to April 2027 and borrowing capacity increased.
- Bed Bath & Beyond, parent of buybuy BABY, disclosed substantial doubt about its ability to continue as a going concern in January 2023. buybuy BABY represented about 23% of Skip Hop wholesale sales in FY2022; Carter’s said it was monitoring the situation and reflected it in credit-loss and impairment analyses.
- Other notable exposures include concentrated wholesale customers and suppliers, sourcing and freight disruption, inflation and consumer spending, inventory markdowns, foreign exchange, cybersecurity, litigation, and product quality or regulatory matters. The company recorded no goodwill impairment in FY2022; it did record the Skip Hop tradename impairment. Management and the auditor reported effective internal controls, and the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers FY2022, not FY2021.
- Track FY2023 inventory reduction and sell-through, especially the $99.2 million pack-and-hold balance and potential markdowns.
- Assess whether pricing can offset product, labor and freight costs without further weakening demand or margins.
- Monitor buybuy BABY exposure, wholesale customer credit quality and the concentration of receivables among major customers.
- Review cash generation, revolving-credit usage, debt maturities and covenant headroom alongside planned dividends and repurchases.
- Evaluate sensitivity of the Skip Hop and OshKosh brand valuations to sales forecasts, discount rates and royalty assumptions.