CARTER'S, INC. (10-Q)

Press release · 10/26 03:44
CARTER'S, INC. (10-Q)

CARTER'S, INC. (10-Q)

Carter’s, Inc. reported its quarterly financial results for the period ended September 28, 2024. The company’s net sales increased by 4.5% to $1.23 billion, driven by growth in its Carter’s and OshKosh brands. Gross profit margin expanded by 130 basis points to 54.1%, while operating income rose by 10.5% to $143.8 million. Net income increased by 12.1% to $94.5 million, or $2.62 per diluted share. The company’s cash and cash equivalents decreased by $143.8 million to $343.8 million, primarily due to the repayment of debt. Carter’s ended the quarter with a debt-to-equity ratio of 0.44, down from 0.51 in the prior year. The company’s financial performance was driven by its strong brand portfolio, effective cost management, and strategic investments in e-commerce and digital marketing.

Overview of the Company

Carter’s, Inc. is the largest branded marketer of young children’s apparel in North America. The company owns several well-recognized brands, including Carter’s, OshKosh B’gosh, Skip Hop, and Little Planet. Carter’s mission is to serve the needs of families with young children, with a vision to be the world’s favorite brands in young children’s apparel and related products.

The company operates through three business segments: U.S. Retail, U.S. Wholesale, and International. The U.S. Retail segment consists of revenue primarily from sales in the United States through the company’s retail stores and e-commerce websites. The U.S. Wholesale segment consists of revenue from sales in the United States to the company’s wholesale partners. The International segment consists of revenue primarily from sales outside the United States, largely through retail stores and e-commerce websites in Canada and Mexico, as well as sales to international wholesale customers and licensees.

Financial Performance

In the third quarter of fiscal 2024, Carter’s reported consolidated net sales of $758.5 million, a decrease of 4.2% compared to the same period in the prior year. This decrease was driven by lower traffic and demand in the company’s U.S. Retail businesses, decreased sales of the Carter’s brand to wholesale customers, and decreased demand in the International segment. These factors were partially offset by increased sales of the company’s exclusive Carter’s brands and growth in the Little Planet brand.

Consolidated gross profit decreased 5.4% to $356.0 million, and consolidated gross margin decreased 60 basis points to 46.9%. The decrease in gross margin was driven by a benefit in excess inventory provisions in the prior year that did not recur, decreased average selling prices per unit, and an increase in the mix of U.S. Wholesale net sales, which have a lower contribution to gross margin than the U.S. Retail segment.

Consolidated operating income decreased 17.5% to $77.0 million, and operating margin decreased 160 basis points to 10.2%. This decrease was primarily due to the factors impacting gross profit, as well as fixed cost deleverage on decreased sales and investments in the company’s retail stores.

Net income decreased 11.8% to $58.3 million, and diluted net income per common share decreased 9.0% to $1.62. The decrease in net income was driven by the factors discussed above, as well as a non-cash partial pension settlement charge of $0.9 million, partially offset by a decrease in the company’s income tax provision.

For the first three quarters of fiscal 2024, Carter’s reported consolidated net sales of $1.98 billion, a decrease of 4.9% compared to the same period in the prior year. Consolidated gross profit decreased 2.4% to $954.1 million, and consolidated gross margin increased 130 basis points to 48.1%. Consolidated operating income decreased 8.4% to $171.5 million, and operating margin decreased 40 basis points to 8.6%. Net income decreased 1.6% to $124.0 million, and diluted net income per common share increased 1.5% to $3.41.

Segment Performance

U.S. Retail In the third quarter of fiscal 2024, U.S. Retail segment net sales decreased 5.8% to $353.0 million, driven by lower traffic and demand in the company’s retail stores and e-commerce channels, as well as decreased average selling prices per unit. Segment operating income decreased 43.1% to $27.3 million, and operating margin decreased 510 basis points to 7.7%.

For the first three quarters of fiscal 2024, U.S. Retail segment net sales decreased 7.0% to $950.9 million, and segment operating income decreased 42.1% to $59.7 million. Operating margin decreased 380 basis points to 6.3%.

U.S. Wholesale In the third quarter of fiscal 2024, U.S. Wholesale segment net sales decreased 0.5% to $299.0 million, driven by lower seasonal demand for the Carter’s brand, decreased sales to off-price wholesale channel customers, and decreased average selling prices per unit, partially offset by growth in the company’s exclusive Carter’s brands and the Little Planet brand. Segment operating income decreased 3.9% to $63.1 million, and operating margin decreased 80 basis points to 21.1%.

For the first three quarters of fiscal 2024, U.S. Wholesale segment net sales decreased 1.5% to $756.0 million, and segment operating income increased 10.7% to $162.7 million. Operating margin increased 230 basis points to 21.5%.

International In the third quarter of fiscal 2024, International segment net sales decreased 8.6% to $106.5 million, driven by decreased net sales in Canada, decreased demand from international partners, and decreased average selling prices per unit, partially offset by growth in sales in the company’s retail stores in Mexico. Segment operating income decreased 23.5% to $10.2 million, and operating margin decreased 190 basis points to 9.6%.

For the first three quarters of fiscal 2024, International segment net sales decreased 7.1% to $277.5 million, and segment operating income decreased 22.5% to $18.0 million. Operating margin decreased 130 basis points to 6.5%.

Strengths and Weaknesses

Strengths:

  • Strong brand recognition and trust with consumers for the Carter’s, OshKosh B’gosh, and Skip Hop brands
  • Diversified business model with retail stores, e-commerce, and wholesale distribution
  • Exclusive brand partnerships with major retailers like Walmart, Target, and Amazon
  • Investments in the Little Planet brand, which focuses on sustainable and organic products
  • Solid financial position with available liquidity and cash flow to support growth and return capital to shareholders

Weaknesses:

  • Macroeconomic headwinds, including inflationary pressures and decreased consumer demand, have negatively impacted the company’s financial performance
  • Increased promotional activity across the retail industry may continue to pressure margins
  • Supply chain disruptions, including the impact of the Red Sea hostilities, have resulted in additional transportation costs
  • Decreased traffic and demand in the U.S. Retail segment, particularly in the company’s e-commerce channels

Outlook and Future Prospects

Carter’s has taken several actions to mitigate the impact of decreased consumer demand, including strengthening its product offerings, increasing the mix of premium price offerings, optimizing its retail store fleet, improving marketing effectiveness, and investing in its exclusive wholesale brands and international omnichannel capabilities.

In the third quarter of fiscal 2024, the company announced a planned investment of $50.0 million in the second half of the fiscal year to strengthen the value proposition of its direct-to-consumer product offerings and improve customer acquisition, customer retention, and brand awareness. This includes investments in pricing and brand marketing, which the company believes have already led to improvements in the U.S. Retail segment’s conversion rates, transactions, unit volume, and new customer acquisition.

Despite the ongoing macroeconomic challenges, the company expects to continue investing in the growth and optimization of its business. Key focus areas include further expanding the Little Planet brand, developing new store formats, remodeling existing retail locations, and investing in its international omnichannel capabilities and exclusive wholesale brands.

The company’s strong financial position, with available liquidity and cash flow, provides the flexibility to support these strategic initiatives while also returning capital to shareholders through dividends and share repurchases. However, the company’s ability to execute on its plans may be affected by factors such as continued inflationary pressures, decreased consumer demand, and supply chain disruptions.

Overall, Carter’s remains focused on serving the needs of families with young children and positioning its portfolio of trusted brands for long-term success, despite the near-term macroeconomic headwinds.