Carter’s, Inc., the largest branded marketer in North America of apparel exclusively for babies and young children, reported its fourth quarter and fiscal 2018 results.

“We saw good demand for our brands in the final months of 2018, with growth driven by our retail and wholesale businesses,” said Michael D. Casey, Chairman and Chief Executive Officer. “In the fourth quarter, our retail sales in the United States grew 7% reflecting, we believe, the strength of our brands and less discretionary nature of young children’s apparel purchases.

“For the year, Carter’s achieved its 30th consecutive year of sales growth, and a record level of profitability enabled by the significant benefits from the Tax Cuts and Jobs Act of 2017.

“We believe Carter’s is well-positioned to achieve good growth in sales and earnings in the years ahead. Carter’s is the market leader in young children’s apparel in North America, and we are extending the reach of our brands throughout the world through eCommerce capabilities and strategic relationships.

“Given our strong balance sheet and cash flow, we plan to continue investing in strategies which we believe will enable us to outperform market trends and deliver attractive returns to shareholders.”

Consolidated Results

Fourth Quarter of Fiscal 2018 compared to Fourth Quarter of Fiscal 2017

Consolidated net sales increased $58.5 million, or 5.7%, to $1.1 billion, principally driven by growth in the Company’s U.S. Retail and U.S. Wholesale segments. Changes in foreign currency exchange rates in the fourth quarter of fiscal 2018 compared to the fourth quarter of fiscal 2017 adversely affected consolidated net sales in the fourth quarter of fiscal 2017 by $3.9 million. On a constant currency basis (a non-GAAP measure), consolidated net sales increased 6.1% in the fourth quarter of fiscal 2018.

Operating income in the fourth quarter of fiscal 2018 increased $24.2 million, or 16.5%, to $170.6 million, compared to $146.4 million in the fourth quarter of fiscal 2017. Fourth quarter fiscal 2017 results include pre-tax expense of $21.2 million for special compensation and related payroll taxes awarded as a result of the Tax Cuts and Jobs Act of 2017 (“TCJA”). Operating margin in the fourth quarter of fiscal 2018 increased 150 basis points to 15.7%, compared to 14.2% in the fourth quarter of fiscal 2017.

Adjusted operating income (a non-GAAP measure) increased $2.5 million, or 1.5%, to $170.5 million, compared to $168.0 million in the fourth quarter of fiscal 2017. Adjusted operating margin (a non-GAAP measure) decreased 60 basis points to 15.7%, compared to 16.3% in the fourth quarter of fiscal 2017, reflecting higher eCommerce shipping costs and promotions, the adverse impact of the Toys “R” Us bankruptcy, and an increase in the mix of lower margin new businesses.

Net income in the fourth quarter of fiscal 2018 decreased $5.6 million, or 4.1%, to $130.6 million, or $2.83 per diluted share, compared to $136.1 million, or $2.85 per diluted share, in the fourth quarter of fiscal 2017. Fourth quarter fiscal 2017 results include a net tax benefit of $40.0 million related to TCJA and after-tax expense of $15.1 million for special compensation and related payroll taxes awarded as a result of this tax reform legislation.

Adjusted net income (a non-GAAP measure) increased $19.5 million, or 17.5%, to $130.9 million, compared to $111.4 million in the fourth quarter of fiscal 2017, reflecting the benefit of lower tax provisions resulting from TCJA. Adjusted earnings per diluted share (a non-GAAP measure) increased 21.8% to $2.84, compared to $2.33 in the fourth quarter of fiscal 2017.

Fiscal 2018 compared to Fiscal 2017

Consolidated net sales increased $61.8 million, or 1.8%, to $3.5 billion, reflecting growth in the Company’s U.S. Retail and International segments, partially offset by a decline in the U.S. Wholesale segment. The decline in U.S. Wholesale sales was largely attributable to the closures of Toys “R” Us and Bon-Ton. Changes in foreign currency exchange rates in fiscal 2018 compared to fiscal 2017 adversely affected consolidated net sales in fiscal 2017 by $2.6 million. On a constant currency basis, consolidated net sales increased 1.9% in fiscal 2018.

Operating income in fiscal 2018 decreased $28.2 million, or 6.7%, to $391.4 million, compared to $419.6 million in fiscal 2017. Fiscal 2018 results include pre-tax expenses totaling $16.2 million related to wholesale customer bankruptcy charges and the Company’s business model transition in China. Fiscal 2017 results include pre-tax expense of $21.2 million for special compensation and related payroll taxes awarded as a result of TCJA. Operating margin in fiscal 2018 decreased 100 basis points to 11.3%, compared to 12.3% in fiscal 2017.

Adjusted operating income decreased $37.6 million, or 8.4%, to $407.3 million, compared to $444.8 million in fiscal 2017. Adjusted operating margin decreased 130 basis points to 11.8%, compared to 13.1% in fiscal 2017, reflecting increased investments in marketing and eCommerce fulfillment capabilities, higher distribution expenses, the adverse impact of the Toys “R” Us and Bon-Ton bankruptcies, and an increase in the mix of lower margin new businesses.

Net income in fiscal 2018 decreased $20.8 million, or 6.9%, to $282.1 million, or $6.00 per diluted share, compared to $302.8 million, or $6.24 per diluted share, in fiscal 2017. Fiscal 2018 results include after-tax expenses totaling $13.6 million related to wholesale customer bankruptcy charges and the Company’s business model transition in China. Fiscal 2017 results include a net tax benefit of $40.0 million related to TCJA and after-tax expense of $15.1 million for special compensation and related payroll taxes awarded as a result of this tax reform legislation.

Adjusted net income increased $15.6 million, or 5.6%, to $295.4 million, compared to $279.8 million in fiscal 2017, reflecting the benefit of lower tax provisions resulting from TCJA. Adjusted earnings per diluted share increased 9.0%, to $6.29, compared to $5.77 in fiscal 2017.

Cash flow from operations in fiscal 2018 was $356.2 million compared to $329.6 million in fiscal 2017. The increase primarily reflected a reduction in federal income taxes, partially offset by unfavorable changes in net working capital.

See the “Reconciliation of GAAP to Adjusted Results” section of this release for additional disclosures and reconciliations regarding non-GAAP measures.

U.S. Retail Segment

Fourth Quarter of Fiscal 2018 compared to Fourth Quarter of Fiscal 2017

U.S. Retail segment sales increased $40.1 million, or 7.1%, to $606.3 million. U.S. Retail comparable sales increased 5.7%, reflecting growth in both eCommerce and retail store sales.

In the fourth quarter of fiscal 2018, the Company opened 19 stores and closed five stores in the United States.

Fiscal 2018 compared to Fiscal 2017

U.S. Retail segment sales increased $75.8 million, or 4.3%, to $1.9 billion. U.S. Retail comparable sales increased 2.8%, driven by growth in eCommerce sales.

In fiscal 2018, the Company opened 55 stores and closed 41 stores in the United States.

As of the end of the fourth quarter of fiscal 2018, the Company operated 844 retail stores¹ in the United States^.

¹ Excludes five temporary Skip Hop stores that were closed in January 2019.

U.S. Wholesale Segment

Fourth Quarter of Fiscal 2018 compared to Fourth Quarter of Fiscal 2017

U.S. Wholesale segment sales increased $21.6 million, or 6.5%, to $351.4 million, reflecting increased shipments of Carter’s products, partially offset by the loss of sales to Toys “R” Us and Bon-Ton. Toys “R” Us and Bon-Ton contributed $32 million to net sales in the fourth quarter of fiscal 2017.

Fiscal 2018 compared to Fiscal 2017

U.S. Wholesale segment sales decreased $29.0 million, or 2.4%, to $1.2 billion, reflecting lower shipments principally due to a decline in sales to Toys “R” Us and Bon-Ton. Toys “R” Us and Bon-Ton contributed $13 million and $107 million to net sales in fiscal years 2018 and 2017, respectively.

International Segment

Fourth Quarter of Fiscal 2018 compared to Fourth Quarter of Fiscal 2017

International segment sales decreased $3.2 million, or 2.4%, to $128.6 million. This decrease was principally driven by lower demand in China and unfavorable movements in foreign currency exchange rates, partially offset by increased demand in Mexico.

Changes in foreign currency exchange rates in the fourth quarter of fiscal 2018 as compared to the fourth quarter of fiscal 2017 adversely affected International segment net sales in the fourth quarter of fiscal 2018 by $3.9 million. On a constant currency basis, International segment net sales increased 0.6%.

Fiscal 2018 compared to Fiscal 2017

International segment sales increased $14.9 million, or 3.6%, to $430.4 million, driven by growth in Mexico, Canada, and various other markets outside of North America, partially offset by lower demand in China.

Changes in foreign currency exchange rates in fiscal 2018 as compared to fiscal 2017 adversely affected International segment net sales in fiscal 2018 by $2.6 million. On a constant currency basis, International segment net sales increased 4.2%.

As of the end of fiscal 2018, the Company operated 188 retail stores in Canada and 42 retail stores in Mexico.

Return of Capital

In the fourth quarter and fiscal year 2018, the Company returned to shareholders a total of $68.1 million and $276.7 million, respectively, through share repurchases and cash dividends as described below.

From the beginning of fiscal 2007 through fiscal 2018, the Company has returned a total of $1.8 billion to shareholders through share repurchases and dividends, and retired approximately 38% of its outstanding shares.

Stock Repurchase Activity

During the fourth quarter of fiscal 2018, the Company repurchased and retired 515,109 shares of its common stock for $47.5 million at an average price of $92.28 per share.

During fiscal 2018, the Company repurchased and retired 1,879,529 shares for $193.0 million at an average price of $102.70 per share.

Fiscal 2019 year-to-date through February 22, 2019, the Company has repurchased and retired a total of 303,611 shares for $25.0 million at an average price of $82.34 per share.

All shares were repurchased in open market transactions pursuant to applicable regulations for open market share repurchases. As of February 22, 2019, the total remaining capacity under the Company’s previously-announced repurchase authorizations was approximately $368 million.

Dividends

During the fourth quarter of fiscal 2018, the Company paid a cash dividend of $0.45 per share totaling $20.6 million.

In fiscal 2018, the Company paid quarterly cash dividends of $0.45 per share each quarter totaling $83.7 million.

On February 14, 2019, the Company’s Board of Directors authorized an 11% increase ($0.05 per share) to its quarterly cash dividend, to $0.50 per share, for payment on March 22, 2019, to shareholders of record at the close of business on March 12, 2019.

Future declarations of quarterly dividends and the establishment of related record and payment dates will be at the discretion of the Company’s Board of Directors based on a number of factors, including the Company’s future financial performance and other considerations.

2019 Business Outlook

For fiscal 2019, the Company projects net sales will increase approximately 1% to 2% and adjusted diluted earnings per share will increase approximately 4% to 6% compared to adjusted diluted earnings per share of $6.29 in fiscal 2018. This forecast for fiscal 2019 adjusted diluted earnings per share excludes anticipated expenses of approximately $2.5 million related to organizational restructuring.

Net sales and adjusted earnings growth in the first quarter of fiscal 2019 are expected to be affected by comparisons to discontinued sales to Toys “R” Us and Bon-Ton in the prior year and a later Easter holiday in 2019 than in 2018. As a result, the Company projects first quarter fiscal 2019 net sales will decline approximately 4% to 5% and adjusted diluted earnings per share to be approximately $0.65 to $0.70 compared to adjusted diluted earnings per share of $1.09 in the first quarter of fiscal 2018. This forecast for first quarter fiscal 2019 adjusted diluted earnings per share excludes anticipated expenses of approximately $2.5 million related to organizational restructuring.

The Company believes these non-GAAP measurements provide investors with a meaningful view of the Company’s core operating results, and are the same measurements used by the Company's executive management to assess the Company's performance. See the “Reconciliation of GAAP to Adjusted Results” section of this release for additional disclosures and reconciliations regarding non-GAAP measures.