Carter’s, Inc. — Form 10-Q Summary
Period discrepancy: The request metadata says 2022 Q2, but the supplied filing is for the fiscal quarter ended July 1, 2023 (second quarter of fiscal 2023), compared with the quarter ended July 2, 2022. The six-month period also compares fiscal 2023 with fiscal 2022. The filing was signed July 28, 2023.
Business context
Carter’s designs, sources, and markets children’s apparel and related products under Carter’s, OshKosh B’gosh, Skip Hop, and other brands. It sells through U.S. and international retail and eCommerce channels, wholesale partners, and licensees. Its three reportable segments are U.S. Retail, U.S. Wholesale, and International.
Financial results
| Metric | Q2 FY2023 | Q2 FY2022 | First two quarters FY2023 | First two quarters FY2022 |
|---|---|---|---|---|
| Net sales | $600.2 million | $700.7 million | $1,296.1 million | $1,482.0 million |
| Gross profit / margin | $291.9 million / 48.6% | $331.2 million / 47.3% | $601.4 million / 46.4% | $686.3 million / 46.3% |
| Operating income / margin | $37.6 million / 6.3% | $75.4 million / 10.8% | $93.9 million / 7.2% | $178.0 million / 12.0% |
| Net income | $23.9 million | $37.0 million | $59.9 million | $104.9 million |
| Diluted EPS | $0.64 | $0.93 | $1.59 | $2.59 |
| Operating cash flow | Not presented by quarter | $209.2 million | $(93.6) million |
Q2 sales fell 14.3% and net income fell 35.4% year over year. For the first two quarters, sales declined 12.5% and net income declined 42.9%. The prior-year six-month results included a $19.9 million loss on extinguishment of debt; its nonrecurrence partly offsets the reported year-over-year decline in current-period earnings.
Q2 segment sales were $323.5 million for U.S. Retail (down 14.7%), $186.9 million for U.S. Wholesale (down 16.6%), and $89.9 million for International (down 7.9%). Segment operating income was $28.2 million, $29.2 million, and $6.7 million, respectively. U.S. Retail and International operating margins contracted substantially; U.S. Wholesale’s margin rose to 15.6% from 15.0%.
Balance sheet, debt, and liquidity
- At July 1, 2023, cash and cash equivalents were $174.5 million; inventories were $681.6 million, down 20.6% from July 2, 2022; and accounts receivable were $132.7 million.
- Long-term debt, net, was $497.0 million, consisting of $500 million principal amount of 5.625% senior notes due March 2027, net of issuance costs. The company had no revolver borrowings at quarter-end, with approximately $845.6 million available, excluding $4.4 million of letters of credit. It borrowed $35 million on the revolver in July 2023, after quarter-end.
- Cash decreased $37.2 million during the first two fiscal quarters. Operating activities provided $209.2 million, investing activities used $26.4 million, and financing activities used $221.3 million. The operating cash flow improvement from the prior-year use of cash was primarily attributed to working-capital changes, including lower inventory.
- Capital expenditures were $26.4 million in the first two quarters. Management planned approximately $75 million of capital expenditures for fiscal 2023.
- The company paid $0.75 per share in each of the first two quarters. It repurchased $39.9 million of shares in the first two quarters, compared with $176.3 million a year earlier. Approximately $709.6 million remained under repurchase authorizations; future dividends and buybacks are subject to business conditions and credit-facility restrictions.
Material changes, outlook, and risks
- Management attributed weaker sales to inflation, higher interest rates, recession concerns, lower consumer sentiment and demand, and cautious wholesale-customer inventory commitments. Q2 units sold declined in the high teens overall; average selling prices rose low-single digits.
- Q2 gross margin improved 130 basis points, mainly from better price realization and lower fabric commitment charges and inventory provisions, partly offset by higher product costs and channel mix. SG&A fell slightly in dollars but rose to 43.1% of sales from 37.3%, reflecting fixed-cost deleverage and higher consulting and performance-based compensation costs.
- Management expected inflationary pressures and weaker consumer sentiment to continue to hurt fiscal 2023 results, but did not provide a clear numerical full-year financial forecast in the supplied filing text. It expected inbound transportation rates, including ocean freight, to decline in the second half of fiscal 2023 and into fiscal 2024.
- Inventory was lower year over year, and management said it was aligning inventory with planned demand through selective pack-and-hold and sales through retail and off-price channels. Industry inventory levels and promotional activity remain risks.
- The company opened 10 U.S. stores and closed 7 in Q2, and projected approximately 36 openings and 1 closure for the remainder of fiscal 2023. It also reported organizational restructuring costs of $3.3 million for the first two quarters and a $1.8 million gain from partially terminating and extending its Atlanta headquarters lease.
- Other disclosed risks include input-cost and labor pressures, whether price increases can offset costs without hurting demand, supply-chain disruption, foreign currency movements, customer financial difficulties, competition, weather, consumer spending, and the ability to sustain dividends and repurchases. The company said it was compliant with revolver covenants and believed liquidity was adequate for at least 12 months. It reported no legal proceedings it believed would materially affect its financial position, results, or cash flows.
Important facts for investors to verify
- Confirm the intended reporting period: the provided filing is Q2 FY2023, not Q2 FY2022.
- Track consumer demand, comparable sales, unit trends, promotional activity, and wholesale customer inventory commitments.
- Assess whether margin improvements can persist as sales decline and input costs, pricing, freight, and channel mix change.
- Review the impact of the post-quarter $35 million revolver borrowing, liquidity, variable interest rates, and credit-facility restrictions on capital returns.
- Compare management’s store-opening and $75 million capital-expenditure plans with subsequent execution and cash generation.