Carter’s, Inc. Reports Third Quarter Fiscal 2020 Results

Staff Report

Monday, October 26th, 2020

Carter’s, Inc. (NYSE:CRI), the largest branded marketer in North America of apparel exclusively for babies and young children, today reported its third quarter fiscal 2020 results.

“We exceeded our sales and earnings goals in the third quarter,” said Michael D. Casey, Chairman and Chief Executive Officer. “The quarter got off to a strong start with our Fourth of July holiday retail sales up 7%. We saw less robust demand in August during the back-to-school shopping period with many children beginning their school year at home and learning virtually. We had the strongest level of demand in September with our Labor Day holiday retail sales up 15%, our best performance in three years.

“Earnings in the quarter were driven by the strength of our product offerings, more effective brand marketing, fewer promotions, curtailed spending and growth in eCommerce sales. eCommerce continues to be our fastest growing and highest margin business.

“We believe our third quarter performance reflects the strength of our brands, our strong value proposition, broad market distribution and the less discretionary nature of children’s apparel.

“As we enter the final weeks of the year, consumer demand is less predictable this holiday season given the lingering effects and, in some markets, resurgence of the coronavirus. That said, we believe we are well-positioned to outperform the market in the balance of 2020 and years ahead by providing the best value and experience in young children’s apparel.”

Adjustments to Reported GAAP Results

In addition to the results presented in this earnings release in accordance with GAAP, the Company has provided adjusted, non-GAAP financial measurements, as presented below. The Company believes these adjustments provide a meaningful comparison of the Company’s results and afford investors a view of what management considers to be the Company's core performance. These measures are presented for informational purposes only. See “Reconciliation of GAAP to Adjusted Results” section of this release for additional disclosures and reconciliations regarding these non-GAAP financial measures.

 

Third Fiscal Quarter

 

2020

 

 

2019

(In millions, except earnings per share)

Operating
Income

 

% Net
Sales

 

Net
Income

 

Diluted
EPS

 

 

Operating
Income

 

% Net
Sales

 

Net
Income

 

Diluted
EPS

As reported (GAAP)

$

113.5

 

 

13.1

%

 

$

81.2

 

 

$

1.85

 

 

 

$

83.9

 

 

8.9

%

 

$

60.3

 

 

$

1.34

 

COVID-19 expenses

3.3

 

 

 

 

2.5

 

 

0.06

 

 

 

 

 

 

 

 

 

 

Retail store operating leases and other long-lived asset impairments, net

1.5

 

 

 

 

1.1

 

 

0.03

 

 

 

 

 

 

 

 

 

 

Productivity/restructuring costs

1.2

 

 

 

 

1.0

 

 

0.02

 

 

 

 

 

 

 

 

 

 

Intangible asset impairment

 

 

 

 

 

 

 

 

 

30.8

 

 

 

 

23.7

 

 

0.53

 

As adjusted

$

119.5

 

 

13.8

%

 

$

85.9

 

 

$

1.96

 

 

 

$

114.7

 

 

12.2

%

 

$

83.9

 

 

$

1.87

 

 

First Three Fiscal Quarters

 

2020

 

 

2019

(In millions, except earnings per share)

Operating
Income

 

% Net
Sales

 

Net
Income

 

Diluted
EPS

 

 

Operating
Income

 

% Net
Sales

 

Net
Income

 

Diluted
EPS

As reported (GAAP)

$

56.0

 

 

2.8

%

 

$

10.7

 

 

$

0.24

 

 

 

$

209.1

 

 

8.6

%

 

$

138.7

 

 

$

3.06

 

Intangible asset impairment

26.5

 

 

 

 

20.2

 

 

0.46

 

 

 

30.8

 

 

 

 

23.7

 

 

0.52

 

Goodwill impairment

17.7

 

 

 

 

17.7

 

 

0.40

 

 

 

 

 

 

 

 

 

 

COVID-19 expenses

18.8

 

 

 

 

14.3

 

 

0.34

 

 

 

 

 

 

 

 

 

 

Productivity/restructuring costs

8.8

 

 

 

 

6.8

 

 

0.15

 

 

 

1.6

 

 

 

 

1.3

 

 

0.03

 

Retail store operating leases and other long-lived asset impairments, net

6.5

 

 

 

 

4.9

 

 

0.11

 

 

 

 

 

 

 

 

 

 

Debt extinguishment loss

 

 

 

 

 

 

 

 

 

 

 

 

 

6.0

 

 

0.13

 

Store restructuring costs

 

 

 

 

 

 

 

 

 

(0.7

)

 

 

 

(0.6

)

 

(0.01

)

China business model change

 

 

 

 

 

 

 

 

 

(2.1

)

 

 

 

(2.1

)

 

(0.05

)

As adjusted

$

134.3

 

 

6.6

%

 

$

74.7

 

 

$

1.70

 

 

 

$

238.7

 

 

9.9

%

 

$

166.9

 

 

$

3.68

 

                                                             

Note: Results may not be additive due to rounding.

                                                           

Consolidated Results

The discussion of results below is presented on an adjusted (non-GAAP) basis where noted.

Third Quarter of Fiscal 2020 compared to Third Quarter of Fiscal 2019

Net sales decreased $78.2 million, or 8.3%, to $865.1 million, compared to $943.3 million in the third quarter of fiscal 2019. The decline reflects decreased sales to certain wholesale customers, decreased traffic to Company-operated stores, and decreased back-to-school sales (all a result of ongoing disruptions related to the COVID-19 pandemic), partially offset by strong eCommerce channel growth. U.S. Retail segment comparable sales declined 3.5%, reflecting a retail store decline, partially offset by eCommerce growth of 17.2%.

Operating income increased $29.7 million, or 35.4%, to $113.5 million, compared to $83.9 million in the third quarter of fiscal 2019. Operating margin increased 420 basis points to 13.1%. Adjusted operating income (a non-GAAP measure) increased $4.9 million, or 4.2%, to $119.5 million, compared to $114.7 million in the third quarter of fiscal 2019. Adjusted operating margin increased 160 basis points to 13.8%, reflecting improved gross margin and strong management of spending.

Net income increased $21.0 million, or 34.8%, to $81.2 million, or $1.85 per diluted share, compared to $60.3 million, or $1.34 per diluted share, in the third quarter of fiscal 2019. Adjusted net income (a non-GAAP measure) increased $2.0 million, or 2.3%, to $85.9 million, compared to $83.9 million in the third quarter of fiscal 2019. Adjusted earnings per diluted share (a non-GAAP measure) increased 4.8% to $1.96, compared to $1.87 in the third quarter of fiscal 2019.

First Three Quarters of Fiscal 2020 compared to First Three Quarters of Fiscal 2019

Net sales decreased $384.3 million, or 15.9%, to $2.03 billion. This decrease reflects the temporary closure of the Company’s retail stores earlier this year, largely in the months of March, April, and May, and decreased sales to certain wholesale customers (both a result of disruptions related to COVID-19), partially offset by strong growth in eCommerce sales. Comparable eCommerce sales in the U.S. increased 39%.

Operating income was $56.0 million, compared to $209.1 million in the first three quarters of fiscal 2019. Adjusted operating income (a non-GAAP measure) was $134.3 million, compared to $238.7 million in the first three quarters of fiscal 2019. The decrease reflects the decline in net sales, increased inventory provisions, and lower royalty income, partially offset by decreased selling, general, and administrative expenses.

Net income was $10.7 million, or $0.24 per diluted share, compared to $138.7 million, or $3.06 per diluted share, in the first three quarters of fiscal 2019. Adjusted net income (a non-GAAP measure) was $74.7 million, compared to $166.9 million in the first three quarters of fiscal 2019. Adjusted earnings per diluted share (a non-GAAP measure) was $1.70, compared to $3.68 in the first three quarters of fiscal 2019.

Net cash provided by operations in the first three quarters of fiscal 2020 was $320.1 million compared to $73.4 million in the first three quarters of fiscal 2019. The increase reflects the extension of vendor payment terms, deferrals of retail store lease and other cash payments, and a reduction in inventory, partially offset by lower earnings related to COVID-19 disruptions.

See the “Business Segment Results” and “Reconciliation of GAAP to Adjusted Results” sections of this release for additional disclosures regarding business segment performance and non-GAAP measures.

Liquidity and Financial Position

During the third quarter of fiscal 2020, the Company repaid $244 million in outstanding borrowings under its $750 million secured revolving credit facility using cash on hand. The Company’s total liquidity at the end of the third quarter of fiscal 2020 was $1.6 billion, comprised of cash and cash equivalents of $831 million and approximately $740 million in available borrowing capacity (exclusive of $7 million of outstanding letters of credit) on its secured revolving credit facility.

Earlier this year, the Company announced that, in connection with the COVID-19 pandemic, it temporarily suspended its common stock share repurchase program and quarterly cash dividend. No distributions of capital occurred in the third quarter of fiscal 2020. Provisions in the Company’s secured revolving credit facility restrict the Company’s ability to pay cash dividends or repurchase its common stock through the third fiscal quarter of 2021, and could have the effect of restricting the Company’s ability to do so thereafter. The Company’s Board of Directors will evaluate future distributions of capital, including share repurchases and dividends, based on a number of factors, including restrictions under the Company’s revolving credit facility, business conditions, the Company’s financial performance, and other considerations.

The Company continues to believe it has sufficient liquidity for the foreseeable future to maintain its operations and manage through the disruption caused by the COVID-19 pandemic.

2020 Business Outlook

Given the market disruption caused by the COVID-19 pandemic, recent spikes in confirmed cases of the coronavirus, and related uncertainty on timing and extent of the market recovery, the Company is not providing fiscal 2020 sales and earnings guidance at this time.