Carter’s, Inc., the largest branded marketer in North America of apparel exclusively for babies and young children, reported its first quarter fiscal 2019 results.

“We exceeded our sales and earnings objectives in the first quarter,” said Michael D. Casey, Chairman and Chief Executive Officer. “As expected, demand for our brands improved meaningfully in the weeks leading up to Easter, which occurred three weeks later than last year. Given the current trends in our business and favorable response to our product offerings and marketing strategies, we are expecting good growth in sales and earnings this year and are reaffirming our growth objectives for 2019.”

Consolidated Results

First Quarter of Fiscal 2019 compared to First Quarter of Fiscal 2018

Net sales decreased $14.7 million, or 1.9%, to $741.1 million, principally driven by declines in the Company’s U.S. Retail and U.S. Wholesale segments. Changes in foreign currency exchange rates in the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 adversely affected consolidated net sales in the first quarter of fiscal 2019 by $3.0 million, or 0.4%. On a constant currency basis (a non-GAAP measure), consolidated net sales decreased 1.5% in the first quarter of fiscal 2019.

Operating income in the first quarter of fiscal 2019 increased $0.5 million, or 0.7%, to $60.8 million, compared to $60.3 million in the first quarter of fiscal 2018. Fiscal 2018 results include $12.8 million in charges related to the bankruptcy of a wholesale customer, Toys “R” Us. Operating margin increased 20 basis points to 8.2%, compared to 8.0% in the first quarter of fiscal 2018.

Adjusted operating income (a non-GAAP measure which excludes unusual items in the first quarters of fiscal 2019 and 2018) decreased $12.4 million, or 17.0%, to $60.3 million, compared to $72.7 million in the first quarter of fiscal 2018. Adjusted operating margin (a non-GAAP measure) decreased 150 basis points to 8.1%, compared to 9.6% in the first quarter of fiscal 2018, which principally reflects changes in channel and customer mix and higher distribution and freight expenses.

Net income in the first quarter of fiscal 2019 decreased $8.0 million, or 18.8%, to $34.5 million, or $0.75 per diluted share, compared to $42.5 million, or $0.89 per diluted share, in the first quarter of fiscal 2018. Fiscal 2019 results include an after-tax net charge of $5.2 million. The net charge relates to early extinguishment of debt, costs related to organizational restructuring, and changes in the Company’s business model in China. Fiscal 2018 results include after-tax net charges totaling $9.5 million, principally related to the wholesale customer bankruptcy noted above.

Adjusted net income (a non-GAAP measure which excludes the unusual items noted above) decreased $12.3 million, or 23.7%, to $39.6 million, compared to $52.0 million in the first quarter of fiscal 2018. Adjusted earnings per diluted share (a non-GAAP measure) in the first quarter of fiscal 2019 declined 20.4% to $0.87, compared to $1.09 in the first quarter of fiscal 2018.

Cash flow from operations in the first quarter of fiscal 2019 was $37.0 million compared to $64.1 million in the first quarter of fiscal 2018. The decline reflects working capital changes and the decrease in net income.

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

Business Segment Results

U.S. Retail Segment

First Quarter of Fiscal 2019 compared to First Quarter of Fiscal 2018

U.S. Retail segment sales decreased $6.7 million, or 1.7%, to $377.1 million. U.S. Retail comparable sales declined 3.7%, reflecting a decline in store sales which were partially offset by growth in eCommerce sales. The Company believes first quarter fiscal 2019 sales were adversely affected by the later timing of Easter, cold weather around the country, and the Gymboree liquidation.

In the first quarter of fiscal 2019, the Company opened four stores and closed fourteen stores in the United States. As of the end of the first quarter of fiscal 2019, the Company operated 834 retail stores in the United States.

U.S. Wholesale Segment

First Quarter of Fiscal 2019 compared to First Quarter of Fiscal 2018

U.S. Wholesale segment net sales decreased $5.5 million, or 1.9%, to $275.4 million, reflecting lower shipments principally due to the loss of sales to Toys “R” Us and Bon-Ton. Toys “R” Us and Bon-Ton contributed $13 million in aggregate to net sales in the first quarter of 2018.

International Segment

First Quarter of Fiscal 2019 compared to First Quarter of Fiscal 2018

International segment net sales decreased $2.6 million, or 2.8%, to $88.6 million, reflecting unfavorable movements in foreign currency exchange rates and lower contributions from Canada and China, partially offset by increased demand in Mexico and other markets outside of North America.

Changes in foreign currency exchange rates in the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 adversely affected International segment net sales in the first quarter of fiscal 2019 by $3.0 million, or 3.3%. On a constant currency basis (a non-GAAP measure), International segment net sales increased 0.5%.

In the first quarter of fiscal 2019, the Company completed the transition of its China retail and wholesale operations to a new, single partner in this market under a full licensing model.

As of the end of the first quarter of fiscal 2019, the Company operated 187 retail stores in Canada and 42 retail stores in Mexico.

Return of Capital

In the first quarter of fiscal 2019, the Company returned to shareholders a total of $62.7 million through share repurchases and cash dividends as described below.

During the first quarter, the Company repurchased and retired 460,257 shares of its common stock for $40.0 million at an average price of $86.83 per share.

Fiscal year-to-date through April 29, 2019, the Company repurchased and retired a total of 634,219 shares for $57.8 million at an average price of $91.21 per share.

All shares were repurchased in open market transactions pursuant to applicable regulations for such transactions. As of April 29, 2019, the total remaining capacity under the Company’s previously announced repurchase authorizations was approximately $335 million.

In the first quarter of fiscal 2019, the Company paid a cash dividend of $0.50 per share totaling $22.8 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.

2019 Business Outlook

For the second quarter of fiscal 2019, the Company projects net sales will increase approximately 4% to 6% compared to the second quarter of fiscal 2018 and adjusted diluted earnings per share to be approximately comparable to diluted earnings per share of $0.79 in the second quarter of fiscal 2018. Note that there were no adjustments to second quarter fiscal 2018 GAAP results.

For fiscal 2019, the Company projects net sales will increase approximately 1% to 2% compared to fiscal 2018 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 fiscal 2019 adjusted earnings forecast excludes the following pre-tax items: 1) charges totaling $7.8 million related to early extinguishment of debt; 2) expenses of $1.6 million related to organizational restructuring; and 3) a benefit of $2.1 million related to the sale of inventory previously reserved in China. These three items were recorded in the first quarter of fiscal 2019.

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.

Adoption of New Accounting Standard

In fiscal 2019, the Company adopted the Financial Accounting Standards Board’s Accounting Standards Codification No. 842, Leases (“ASC 842”), which requires substantially all of its operating leases, including retail leases, to be recorded on the balance sheet as a right-of-use asset and lease liability. The adoption of ASC 842 had a material impact on the Company’s consolidated balance sheets, but did not have a material impact on its consolidated income statements or statements of cash flows.