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

“Excluding the unusual charge related to the Toys “R” Us bankruptcy, we achieved our sales and earnings objectives in the first quarter,” said Michael D. Casey, Chairman and Chief Executive Officer. “Our growth was driven by our retail and international segments, including good contribution from our Skip Hop and Mexico businesses acquired last year. The Toys “R” Us store closures will affect the growth of our wholesale sales this year. Longer term, we believe Carter’s is uniquely positioned to recapture lost sales to Toys “R” Us given our presence in over 18,000 retail store locations in the United States and leading website in branded children’s apparel. Given the strength of our product offerings, investments in brand marketing and eCommerce capabilities, and the benefit from the new federal tax law, we are expecting good growth in sales and earnings this year.”

Adoption of New Accounting Standard

Beginning in fiscal 2018, the Company adopted the Financial Accounting Standards Board’s Accounting Standards Codification No. 606, Revenue from Contracts with Customers, and related amendments (“ASC 606”) using the full retrospective adoption method. All periods in fiscal 2017 and fiscal 2016 were amended to reflect these provisions, and retained earnings at January 2, 2016 (beginning of fiscal 2016) were adjusted for the cumulative effect of periods prior to fiscal 2016. The adoption of ASC 606 had no material effect on the Company’s consolidated financial position, results of operations, or cash flows.

Consolidated Results

First Quarter of Fiscal 2018 compared to First Quarter of Fiscal 2017

Net sales increased $23.0 million, or 3.1%, to $755.8 million, principally driven by growth in the Company’s U.S. Retail and International segments including contributions from the 2017 Skip Hop and Mexico licensee acquisitions, partially offset by a net sales decline in the U.S. Wholesale segment. Changes in foreign currency exchange rates in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 favorably affected consolidated net sales in the first quarter of fiscal 2018 by $2.8 million, or 0.4%. On a constant currency basis (a non-GAAP measure), consolidated net sales increased 2.8% in the first quarter of fiscal 2018.

Operating income in the first quarter of fiscal 2018 decreased $18.1 million, or 23.1%, to $60.3 million, compared to $78.5 million in the first quarter of fiscal 2017. 2018 results include $12.8 million in charges related to the bankruptcy of a wholesale customer, Toys “R” Us. Operating margin decreased 270 basis points to 8.0%, compared to 10.7% in the first quarter of fiscal 2017.

Adjusted operating income (a non-GAAP measure which excludes the $12.8 million charge noted above and other unusual items in the first quarters of fiscal 2018 and 2017) decreased $7.6 million, or 9.5%, to $72.7 million, compared to $80.3 million in the first quarter of fiscal 2017. Adjusted operating margin (a non-GAAP measure) decreased 140 basis points to 9.6%, compared to 11.0% in the first quarter of fiscal 2017, which principally reflects a higher mix of retail sales, deleverage from acquisitions, and increased investments in marketing.

Net income in the first quarter of fiscal 2018 decreased $4.1 million, or 8.9%, to $42.5 million, or $0.89 per diluted share, compared to $46.6 million, or $0.95 per diluted share, in the first quarter of fiscal 2017.

Adjusted net income (a non-GAAP measure) increased $4.2 million, or 8.8%, to $52.0 million, compared to $47.8 million in the first quarter of fiscal 2017. Adjusted earnings per diluted share (a non-GAAP measure) in the first quarter of fiscal 2018 increased 12.2% to $1.09, compared to $0.97 in the first quarter of fiscal 2017.

Cash flow from operations in the first quarter of fiscal 2018 was $64.1 million compared to $84.2 million in the first quarter of fiscal 2017. The decrease was principally driven by an increase in working capital.

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

Business Segment Results

First Quarter of Fiscal 2018 compared to First Quarter of Fiscal 2017

U.S. Retail Segment

U.S. Retail segment sales increased $19.9 million, or 5.5%, to $383.7 million. U.S. Retail comparable sales increased 3.0%, driven by eCommerce sales growth.

In the first quarter of fiscal 2018, the Company opened nine stores and closed 21 stores in the United States. As of the end of the first quarter of fiscal 2018, the Company operated 818 retail stores in the United States.

U.S. Wholesale Segment

U.S. Wholesale segment net sales decreased $11.7 million, or 4.0%, to $280.8 million, reflecting lower demand for Carter’s and OshKosh products, partially offset by contributions from the Skip Hop acquisition.

International Segment

International segment net sales increased $14.8 million, or 19.3%, to $91.2 million, driven by contributions from the Mexico and Skip Hop acquisitions and growth in Canada, partially offset by decreased wholesale demand across various markets outside of the U.S.

Changes in foreign currency exchange rates in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 favorably affected International segment net sales in the first quarter of fiscal 2018 by $2.8 million, or 3.6%. On a constant currency basis (a non-GAAP measure), International segment net sales increased 15.7%.

For the first quarter of fiscal 2018, Canada retail comparable sales increased 3.6%. As of the end of the first quarter of fiscal 2018, the Company operated 179 retail stores in Canada and 42 retail stores in Mexico.

Return of Capital

In the first quarter of fiscal 2018, the Company returned to shareholders, through share repurchases and cash dividends, a total of $46.4 million.

During the first quarter, the Company repurchased and retired 221,313 shares of its common stock for $25.2 million at an average price of $113.84 per share. Fiscal year-to-date through April 25, 2018, the Company has repurchased and retired a total of 426,768 shares for $46.8 million at an average price of $109.64 per share. All shares were repurchased in open market transactions pursuant to applicable regulations for such transactions. As of April 25, 2018, the total remaining capacity under the Company’s previously announced repurchase authorizations was approximately $539 million.

In the first quarter, the Company paid a cash dividend of $0.45 per share totaling $21.2 million. 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.

2018 Business Outlook

For the second quarter of fiscal 2018, the Company projects net sales to be approximately $680 million and adjusted diluted earnings per share to be approximately $0.53 compared to adjusted diluted earnings per share of $0.79 in the second quarter of fiscal 2017. Net sales and adjusted earnings in the second quarter of fiscal 2018 are expected to be affected by: 1) discontinued sales to Toys “R” Us; 2) the earlier Easter holiday, which shifted holiday-related demand into the Company’s first quarter of 2018; and 3) slower sales trends due to unseasonably cold weather.

For fiscal 2018, the Company projects net sales to increase approximately 3% compared to fiscal 2017 and adjusted diluted earnings per share to increase approximately 12% compared to adjusted diluted earnings per share of $5.77 in fiscal 2017. Forecasted net sales and adjusted earnings for fiscal 2018 assume: 1) the Company recaptures approximately half of the lost sales previously planned to Toys “R” Us; 2) a reduction in discretionary spending from originally planned levels; and 3) an estimated effective tax rate of approximately 22%. This adjusted earnings forecast excludes the unusual charge of approximately $12.8 million related to the Toys “R” Us bankruptcy and a benefit of approximately $0.4 million related to an insurance recovery associated with unusual storm-related store closures, both of which were recorded in the first quarter of fiscal 2018.

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.