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 2024 results.

“We exceeded our third quarter sales and earnings objectives,” said Michael D. Casey, Chairman and Chief Executive Officer.

“Our U.S. Retail sales were better than planned and driven by the strength of our product offerings, and effectiveness of our pricing and brand marketing strategies.

“In July, we initiated a plan to invest $40 million in more competitive pricing and $10 million in additional brand marketing in the second half of this year. We believe these investments, together with better in-store and online shopping experiences, improved the trend in our U.S. Retail sales in the third quarter. Compared to the first half of this year, we saw improving trends in conversion rates, transactions, unit volume, and new customer acquisition.

“Third quarter U.S. Wholesale sales were in line with our expectations. Compared to last year, our exclusive brands sold to mass channel retailers were a source of growth in the third quarter. Our sales to department stores and off-price retailers were lower than last year.

“In this inflationary cycle, we are benefiting from consumers choosing the ease of one-stop shopping with Target, Walmart, and Amazon, where they can purchase groceries, diapers, baby formula, and children’s apparel at one location. Carter’s has an unparalleled competitive advantage as the largest supplier of young children’s apparel to these retailers.

“Sales in our International business in the third quarter were also in line with our expectations, but lower than last year. Compared to last year, we had a slower start to cooler weather apparel sales in Canada, and lower wholesale shipments to the Middle East and Europe. Sales growth in Mexico was offset by unfavorable changes in currency exchange rates.

“Cash flow through September was better than planned. Relative to last year, we ended the third quarter with a higher cash balance, no seasonal borrowings, lower interest costs, and over $1 billion in liquidity.

“Our consolidated sales have been under pressure since inflation rose to historic levels in 2022 because those we serve, families raising young children, have been under financial pressure and have reduced their discretionary spending where possible. Carter’s is working its way through a historic and challenging inflationary period. We plan to use this down cycle to strengthen our leading market position as the best-selling national brand in young children’s apparel.

“Our growth strategies are focused on the fundamentals, which include:

• elevating the style and value of our product offerings;

• improving our marketing capabilities and effectiveness; and

• leveraging our unparalleled multi-channel market presence to extend the reach of our brands.

“With the strength of our high-margin business model and cash flow generation, we have the resources to invest in our growth strategies, which we expect will better position us to return to growth when market conditions improve.

“Given our better than expected performance in the third quarter, we are reaffirming our previous outlook for sales and profitability this year.”

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 non-GAAP financial measurements provide a meaningful comparison of the Company’s results and afford investors a view of what management considers to be the Company’s underlying performance. These measurements are presented for informational purposes only. See “Reconciliation of Adjusted Results to GAAP” section of this release for additional disclosures and reconciliations regarding these non-GAAP financial measures. Adjustments made to the third quarter and first three quarters of fiscal 2024 results reflect a non-cash charge for a partial settlement of the OshKosh B’Gosh Pension Plan. Adjustments made to the third quarter and first three quarters of fiscal 2023 results reflect costs related to organizational restructuring.

Consolidated Results

Third Quarter of Fiscal 2024 compared to Third Quarter of Fiscal 2023

Net sales decreased $33.2 million, or 4.2%, to $758.5 million, compared to $791.7 million in the third quarter of fiscal 2023. Macroeconomic factors, including inflation and higher interest rates, have weighed on families with young children and demand for our brands. U.S. Retail, International, and U.S. Wholesale segment net sales declined 5.8%, 8.6%, 0.5%, respectively. U.S. Retail comparable net sales declined 7.1%. Changes in foreign currency exchange rates in the third quarter of fiscal 2024, as compared to the third quarter of fiscal 2023, had an unfavorable effect on consolidated net sales of approximately $3.1 million, or 0.4%.

Operating income decreased $16.4 million, or 17.5% to $77.0 million, compared to $93.4 million in the third quarter of fiscal 2023. Operating margin decreased to 10.2%, compared to 11.8% in the prior-year period, reflecting fixed cost deleverage on lower sales and investments in pricing, marketing, and stores, partially offset by lower product costs, lower professional fees, and lower performance-based compensation provisions.

Adjusted operating income (a non-GAAP measure) decreased $19.3 million, or 20.0% to $77.0 million, compared to $96.3 million in the third quarter of fiscal 2023. Adjusted operating margin decreased to 10.2%, compared to 12.2% in the prior year period, principally due to the factors noted above.

Net income was $58.3 million, or $1.62 per diluted share, compared to $66.1 million, or $1.78 per diluted share, in the third quarter of fiscal 2023.

Adjusted net income (a non-GAAP measure) was $59.0 million, compared to $68.4 million in the third quarter of fiscal 2023. Adjusted earnings per diluted share (a non-GAAP measure) was $1.64, compared to $1.84 in the prior-year quarter.

First Three Quarters of Fiscal 2024 compared to First Three Quarters of Fiscal 2023

Net sales decreased $103.3 million, or 4.9%, to $1.98 billion, compared to $2.09 billion in the first three quarters of fiscal 2023. Macroeconomic factors, as noted in the discussion of third quarter results above, negatively affected demand in the current year-to-date period. U.S. Retail, International, and U.S. Wholesale segment net sales declined 7.0%, 7.1%, and 1.5%, respectively. U.S. Retail comparable net sales declined 8.5%. Changes in foreign currency exchange rates in the first three quarters of fiscal 2024, as compared to the first three quarters of fiscal 2023, had an unfavorable effect on consolidated net sales of approximately $1.5 million, or 0.1%.

Operating income decreased $15.8 million, or 8.4% to $171.5 million, compared to $187.3 million in the first three quarters of fiscal 2023. Operating margin declined to 8.6%, compared to 9.0% in the prior year period, reflecting fixed cost deleverage on lower sales and investments in pricing, marketing, and stores, partially offset by lower inbound freight and product costs, lower performance-based compensation provisions, and lower professional fees.

Adjusted operating income (a non-GAAP measure) decreased $20.2 million, or 10.6% to $171.5 million, compared to $191.8 million in the first three quarters of fiscal 2023. Adjusted operating margin declined to 8.6%, compared to 9.2% in the prior year period, principally due to the factors noted above.

Net income was $124.0 million, or $3.41 per diluted share, compared to $126.0 million, or $3.36 per diluted share, in the first three quarters of fiscal 2023.

Adjusted net income (a non-GAAP measure) was $124.7 million, compared to $129.4 million in the first three quarters of fiscal 2023. Adjusted earnings per diluted share (a non-GAAP measure) was $3.43, compared to adjusted earnings per diluted share of $3.45 in the first three quarters of fiscal 2023.

Net cash provided by operations in the first three quarters of fiscal 2024 was $11.3 million, compared to net cash provided by operations of $205.8 million in the first three quarters of fiscal 2023. The change in net cash from operating activities was primarily driven by a more significant reduction in inventory in fiscal 2023 than in 2024.

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

The Company’s total liquidity at the end of the third quarter of fiscal 2024 was $1.02 billion, comprised of cash and cash equivalents of $176 million and $844 million in unused borrowing capacity on the Company’s $850 million secured revolving credit facility.

Return of Capital

In the third quarter and first three quarters of fiscal 2024, the Company returned to shareholders a total of $45.6 million and $137.9 million, respectively, through cash dividend and share repurchases as described below.

• Dividends: In the third quarter of fiscal 2024, the Company paid a cash dividend of $0.80 per common share totaling $28.8 million. In the first three quarters of fiscal 2024, the Company paid cash dividends totaling $87.3 million. Future payments of quarterly dividends 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.

• Share repurchases: During the third quarter of fiscal 2024, the Company repurchased and retired approximately 0.3 million shares of its common stock for $16.7 million at an average price of $61.01 per share. In the first three quarters of fiscal 2024, the Company repurchased and retired approximately 0.7 million shares of its common stock for $50.5 million at an average price of $68.61 per share. All shares were repurchased in open market transactions pursuant to applicable regulations for such transactions. As of September 28, 2024, the total remaining capacity under the Company’s previously announced repurchase authorizations was approximately $599 million. No shares were repurchased in the fourth quarter of fiscal 2024 through October 24, 2024.

The Company paused share repurchases during the third quarter of fiscal 2024. In light of share repurchases completed and dividends paid in the first three quarters of fiscal 2024, along with our projected remaining dividend payments this year, we expect the cumulative distribution of capital through share repurchases and dividends to represent somewhat more than 100% of our projected fiscal year 2024 free cash flow, a non-GAAP measure the Company defines as operating cash flow minus capital expenditures¹.

OshKosh B’Gosh Pension Plan

During the second quarter of fiscal 2024, the Company announced the offering of a single-sum payment option to certain participants in the frozen OshKosh B’Gosh, Inc. Pension Plan (the “pension plan”), which commenced on June 1, 2024 and closed on July 15, 2024. Payouts from pension plan assets totaling $6.9 million were made to electing participants in August 2024. The transaction had no cash impact on the Company but did result in a non-cash pre-tax partial pension plan settlement charge of $0.9 million in the third quarter of fiscal 2024.

Additionally, the Board of Directors authorized the termination of the pension plan, with an anticipated effective date of November 30, 2024. The Company may be required to make a contribution to fully fund the plan for termination prior to the purchase of a group annuity contract to transfer its remaining liabilities under the pension plan. The contribution amount will depend upon the nature and timing of participant settlements and prevailing market conditions. The Company expects to recognize a non-cash charge upon settlement of the pension plan’s obligations in the second half of fiscal 2025. The Company has the right to change the effective date of the termination date or revoke the decision to terminate, but it has no current intent to do so.

2024 Business Outlook

We do not reconcile forward-looking adjusted operating income, adjusted diluted earnings per share, or free cash flow to their most directly comparable GAAP measures because we cannot predict with reasonable certainty the ultimate outcome of certain components of such reconciliations that are not within our control due to factors described below, or others that may arise, without unreasonable effort. For these reasons, we are unable to assess the probable significance of the unavailable information, which could materially impact the amount of future operating income, diluted EPS, or operating cash flow, the most directly comparable GAAP metrics to adjusted operating income, adjusted diluted earnings per share, and free cash flow, respectively.

For fiscal year 2024, the Company is reaffirming its previously-provided guidance for net sales and adjusted operating income and is increasing its outlook for adjusted diluted earnings per share based on its revised expectations for lower borrowing costs and a lower effective tax rate. Accordingly, for fiscal year 2024 the Company now projects approximately:

• $2.785 billion to $2.825 billion in net sales ($2.95 billion in fiscal 2023);

• $240 million to $260 million in adjusted operating income ($328 million in fiscal 2023);

• $4.70 to $5.15 in adjusted diluted earnings per share, excluding a non-cash, pre-tax partial pension plan settlement charge of $0.9 million (previous guidance $4.60 to $5.05; $6.19 in fiscal 2023);

• Operating cash flow in excess of $200 million ($529 million in fiscal 2023); and

• Capital expenditures of $65 million (previous guidance $75 million; $60 million in fiscal 2023).

Our projections for fiscal year 2024 assume (comparisons vs. prior year):

• comparable gross profit margin;

• increased SG&A, reflecting growth-related investments and inflation, partially offset by cost reduction initiatives;

• lower net interest expense;

• lower effective tax rate; and

• lower share count.

For the fourth quarter of fiscal 2024, the Company projects approximately:

• $800 million to $840 million in net sales ($858 million in Q4 fiscal 2023);

• $70 million to $90 million in adjusted operating income ($136 million in Q4 fiscal 2023); and

• $1.32 to $1.72 in adjusted diluted earnings per share ($2.76 in Q4 fiscal 2023).

Our projections for the fourth quarter of fiscal 2024 assume (comparisons vs. prior year unless otherwise noted):

• continued macroeconomic pressure on consumer demand;

• approximately $30 million of investments in pricing & brand marketing (approximately $60 million in total for the second half of fiscal 2024);

• lower gross profit margin;

• increased SG&A;

• lower net interest expense;

• lower effective tax rate; and

• lower share count.

Conference Call

The Company will hold a conference call with investors to discuss third quarter fiscal 2024 results and its business outlook on October 25, 2024 at 8:30 a.m. Eastern Daylight Time. To listen to a live webcast and view the accompanying presentation materials, please visit ir.carters.com and select links for “News & Events” followed by “Events.”

To access the call by phone, please preregister via the following link to receive your dial-in number and unique passcode: https://register.vevent.com/register/BI006507754eff4716a3479a87d2db574b.

A webcast replay will be available shortly after the conclusion of the call at ir.carters.com.