Carter’s, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and first three fiscal quarters ended October 1, 2022, compared with the periods ended October 2, 2021. The request metadata says “2021 Q3,” but the filing itself reports fiscal 2022 Q3.
Business context
Carter’s designs, sources, and markets children’s apparel and related products through retail stores, eCommerce, wholesale partners, and licensing. Its brands include Carter’s, OshKosh B’gosh, Skip Hop, and Little Planet. The company operated 970 retail stores in North America at quarter-end.
Financial performance
Amounts are in millions of dollars except per-share data. Net sales exclude royalty income, which is presented separately.
| Metric | Q3 2022 | Q3 2021 | First 3 quarters 2022 | First 3 quarters 2021 |
|---|---|---|---|---|
| Net sales | $818.6 | $890.6 | $2,300.6 | $2,424.3 |
| Gross profit / margin | $370.5 / 45.3% | $408.8 / 45.9% | $1,056.8 / 45.9% | $1,169.4 / 48.2% |
| Operating income / margin | $91.6 / 11.2% | $124.0 / 13.9% | $269.6 / 11.7% | $359.1 / 14.8% |
| Net income | $65.0 | $85.0 | $169.9 | $242.8 |
| Diluted EPS | $1.67 | $1.93 | $4.26 | $5.51 |
| Operating cash flow | Not separately presented for quarter | $(217.5) | $7.3 |
- Quarterly net sales declined 8.1%; U.S. Retail sales fell 12.3%, U.S. Wholesale fell 1.9%, and International fell 6.7%. Year-to-date sales declined 5.1%, led by an 11.0% decrease in U.S. Retail; U.S. Wholesale and International grew 1.3% and 2.6%, respectively.
- Quarterly gross margin decreased 60 basis points; year-to-date gross margin declined 230 basis points. Management cited higher inbound freight and product costs, inventory provisions, and unfavorable channel/customer mix, partly offset by better pricing and less air freight.
- Quarterly SG&A decreased 2.4% in dollars but increased to 35.0% of sales from 32.9%, reflecting fixed-cost deleverage and transportation and warehouse-relocation costs. Operating income fell 26.2% in the quarter and 24.9% year to date.
- Quarterly net income declined 23.6%; year-to-date net income declined 30.0%. Year-to-date results included a $19.9 million loss on extinguishment of debt; without adjustment, the filing reports no adjusted earnings measure.
- Year-to-date operating cash flow was negative, primarily reflecting planned early inventory receipts, higher product costs, lower net income, and payment of prior-year performance compensation. Investing cash use was $26.9 million, including $26.9 million of capital expenditures.
Financial position and capital allocation
- At October 1, 2022, cash was $121.6 million, inventory $899.3 million, current assets $1,360.1 million, and current liabilities $565.6 million. Inventory was up 24.5% year over year, reflecting earlier receipts, longer holding periods, higher costs, and lower-than-projected sales.
- Debt, net, was $736.4 million: $500 million of 5.625% senior notes due 2027 and $240 million drawn on the revolving facility, net of debt issuance costs. The facility had $606.4 million available and $3.6 million of letters of credit; the company reported covenant compliance. A $40 million revolver repayment in October, after quarter-end, reduced borrowings to $200 million.
- The company redeemed $500 million of 5.500% notes due 2025 in April, paying a $15.7 million premium and recording a $19.9 million extinguishment loss. Management expects the redemption to reduce annual cash interest expense by $27.5 million through May 2025.
- In the first three quarters, Carter’s repurchased 2.94 million shares for $241.8 million and paid $89.6 million in dividends. The quarterly dividend was $0.75 per share. Remaining repurchase authorization was approximately $807.4 million; future repurchases and dividends are discretionary and subject to facility restrictions.
Outlook, commentary, and risks
- Management described a challenging retail environment, with inflation, weaker consumer sentiment, higher interest rates, recession concerns, and reduced demand affecting results. Supply-chain disruption, port delays, and elevated freight and input costs were expected to pressure results through the remainder of fiscal 2022.
- Inventory was expected to remain elevated into fiscal 2023. Carter’s cited purchase reductions/cancellations, selective pack-and-hold, and use of its own channels to manage excess stock. Increased promotional activity across retail was also noted.
- Management planned to offset costs through selected price increases, product-cost optimization, supplier diversification, shipping-contract choices, and reduced discretionary spending; it cautioned these actions might not cover all costs and could hurt demand. The filing provides no specific earnings or revenue guidance.
- Planned fiscal 2022 capital expenditures were approximately $50 million. Management projected 22 store openings and one closure in Q4, and saw potential for at least 100 net U.S. store openings over five years, including 2022 openings.
- The company stated that available cash, operating cash flow, and revolver capacity were expected to fund requirements for at least 12 months. Variable-rate revolver exposure was $240 million at quarter-end; a hypothetical 100-basis-point rate increase would add $2.4 million of annual interest expense.
- Foreign exchange reduced reported sales by approximately $2.9 million in Q3 and $5.4 million year to date. The company reported no legal proceedings it believed would materially affect its financial position, results, or cash flows; it reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether elevated inventory can be reduced without deeper discounting, greater provisions, or further margin pressure.
- Whether consumer demand, comparable sales, and wholesale orders stabilize, particularly in U.S. Retail and Canada.
- How freight, product costs, foreign exchange, and promotional activity affect margins and cash generation.
- Working-capital needs, revolver usage and availability, covenant compliance, and the refinancing or redemption plan for the 2027 notes under the facility’s springing-maturity provision.
- The sustainability of dividends and repurchases given negative year-to-date operating cash flow and the company’s elevated inventory position.