Carter’s(US:CRI)2024-07-26 10:18markdown [Executive Summary and Highlights](index=1&type=section&id=Executive%20Summary%20and%20Highlights) Carter's achieved its second quarter sales and earnings objectives despite a slow start and a highly promotional market. The company reported a record gross profit margin, reflecting strong product offerings and lower costs. While sales declined 5% in the first half, EPS grew 13%. The company ended the quarter with a strong liquidity position of over $1 billion and returned $92 million to shareholders in H1 2024. However, weaker market conditions and declining consumer confidence have led to a risk-adjusted forecast for the full year | Metric | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Net Sales | $564 million | $600 million | | Operating Margin | 7.0% | 6.3% | | Diluted EPS | $0.76 | $0.64 | - Achieved a record gross profit margin despite a highly promotional market, attributed to strong product offerings and lower inbound freight and product costs[3](index=3&type=chunk) - For the first half of 2024, earnings per share grew **13%** on **5%** lower sales[4](index=4&type=chunk) - Returned **$54 million** to shareholders in Q2 and **$92 million** in H1 2024 through dividends and share repurchases[5](index=5&type=chunk) - The company ended the quarter with over **$1 billion** in liquidity, a higher cash balance, and no seasonal borrowings[4](index=4&type=chunk) [Management Commentary and Strategy](index=3&type=section&id=Management%20Commentary%20and%20Strategy) Management noted strong demand in the U.S. Wholesale segment, benefiting from consumers' preference for one-stop shopping at mass channel retailers. Conversely, U.S. Retail and International segments saw lower sales due to reduced traffic and weaker Canadian market conditions. The company acknowledged that market conditions were weaker than anticipated due to persistent inflation and declining consumer confidence. In response, Carter's has risk-adjusted its annual forecast and is focusing on fundamental growth strategies - U.S. Wholesale segment saw earlier and higher demand, benefiting from consumers choosing mass channel retailers for one-stop shopping[6](index=6&type=chunk) - U.S. Retail sales were lower due to fewer visits and lower conversion rates, while International sales were down due to weak market conditions in Canada[7](index=7&type=chunk) - Market conditions were unexpectedly weaker in Q2, with consumer confidence declining to an eight-month low in July[9](index=9&type=chunk) - Core growth strategies include: elevating product style and value, deepening customer relationships through new marketing, and leveraging its multi-channel presence[11](index=11&type=chunk) [Consolidated Financial Performance](index=4&type=section&id=Consolidated%20Financial%20Performance) The company provides a detailed breakdown of its financial results for the second quarter and first half of fiscal 2024, comparing them to the same periods in 2023. The analysis covers net sales, operating income, net income, and earnings per share on both a GAAP and adjusted non-GAAP basis. While overall sales declined, profitability metrics showed improvement due to cost management [Second Quarter Fiscal 2024 vs. 2023](index=4&type=section&id=Second%20Quarter%20of%20Fiscal%202024%20compared%20to%20Second%20Quarter%20of%20Fiscal%202023) In Q2 2024, net sales fell **6.0%** to **$564.4 million**, impacted by macroeconomic pressures. U.S. Wholesale grew **3.2%**, but U.S. Retail and International sales declined **10.3%** and **9.6%**, respectively. Despite the sales drop, operating income rose **5.0%** to **$39.5 million**, and the operating margin expanded from **6.3%** to **7.0%**, driven by lower costs. This resulted in an increase in net income to **$27.6 million** and diluted EPS to **$0.76** | Metric | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $564.4M | $600.2M | -6.0% | | Operating Income | $39.5M | $37.6M | +5.0% | | Net Income | $27.6M | $23.9M | +15.5% | | Diluted EPS | $0.76 | $0.64 | +18.8% | - Operating margin increased to **7.0%** from **6.3%** in the prior year, reflecting lower inbound freight and product costs, partially offset by fixed cost deleverage on lower sales[15](index=15&type=chunk)[16](index=16&type=chunk) - Segment Sales Performance (YoY): - U.S. Wholesale: **+3.2%** - U.S. Retail: **-10.3%** - International: **-9.6%**[14](index=14&type=chunk) [First Half Fiscal 2024 vs. 2023](index=5&type=section&id=First%20Half%20of%20Fiscal%202024%20compared%20to%20First%20Half%20of%20Fiscal%202023) For the first half of 2024, net sales decreased **5.4%** to **$1.23 billion**, with declines across all segments. Operating income saw a slight increase of **0.6%** to **$94.5 million**, and the operating margin improved to **7.7%** from **7.2%** in the prior year, mainly due to lower costs. Net income for the period was **$65.7 million**, with diluted EPS rising to **$1.80** from **$1.59** in H1 2023 | Metric | H1 2024 | H1 2023 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1.23B | $1.30B | -5.4% | | Operating Income | $94.5M | $93.9M | +0.6% | | Net Income | $65.7M | $59.9M | +9.7% | | Diluted EPS | $1.80 | $1.59 | +13.2% | - Segment Sales Performance (YoY): - U.S. Retail: **-7.6%** - U.S. Wholesale: **-2.1%** - International: **-6.1%**[18](index=18&type=chunk) - Adjusted diluted EPS for H1 2024 was **$1.80**, compared to **$1.62** in H1 2023[21](index=21&type=chunk) [Financial Position and Capital Allocation](index=6&type=section&id=Financial%20Position%20and%20Capital%20Allocation) This section details the company's strong financial health, highlighting its liquidity, cash flow, and capital return activities. Carter's maintains a robust liquidity position and has actively returned capital to shareholders through both dividends and share repurchases during the first half of 2024 [Liquidity and Financial Position](index=6&type=section&id=Liquidity%20and%20Financial%20Position) At the end of Q2 2024, Carter's reported total liquidity of **$1.2 billion**, consisting of **$317 million** in cash and cash equivalents and **$844 million** in unused borrowing capacity. Net cash provided by operations in the first half was **$91.7 million**, a decrease from **$209.2 million** in H1 2023, which was primarily due to a significant inventory reduction in the prior year - Total liquidity at the end of Q2 2024 was **$1.2 billion**[23](index=23&type=chunk) - Net cash from operations for H1 2024 was **$91.7 million**, compared to **$209.2 million** in H1 2023[22](index=22&type=chunk) [Return of Capital](index=6&type=section&id=Return%20of%20Capital) In Q2 2024, the company returned **$54.0 million** to shareholders, comprising **$29.2 million** in dividends and **$24.8 million** in share repurchases. For the first half of the year, total capital returned was **$92.3 million**. As of July 25, 2024, approximately **$604 million** remained under the company's share repurchase authorizations | Capital Return Activity | Q2 2024 | H1 2024 | | :--- | :--- | :--- | | Total Returned to Shareholders | $54.0M | $92.3M | | Dividends Paid | $29.2M | $58.5M | | Share Repurchases | $24.8M | $33.8M | - In Q2 2024, repurchased **0.4 million** shares at an average price of **$69.98** per share[25](index=25&type=chunk) - As of July 25, 2024, the remaining capacity under share repurchase authorizations was approximately **$604 million**[25](index=25&type=chunk) [Corporate Developments](index=6&type=section&id=Corporate%20Developments) The company announced significant corporate actions, including the termination process for the OshKosh B'Gosh Pension Plan, which will involve non-cash charges in Q3 2024 and a final settlement in 2025. Additionally, Carter's strengthened its leadership team by appointing a new Chief Retail & Digital Officer and a new Chief Information & Technology Officer to enhance performance, particularly in e-commerce [OshKosh B'Gosh Pension Plan](index=6&type=section&id=OshKosh%20B%27Gosh%20Pension%20Plan) Carter's is terminating the frozen OshKosh B'Gosh Pension Plan. A single-sum payment option was offered to certain participants, with payments expected in August 2024, resulting in an estimated non-cash charge of **$1-2 million** in Q3 2024. The full termination is anticipated by November 30, 2024, with the final settlement of remaining liabilities through annuity purchases expected in the second half of fiscal 2025 - The company is terminating the frozen OshKosh B'Gosh, Inc. Pension Plan, with an anticipated effective date of November 30, 2024[27](index=27&type=chunk) - Expects to recognize a non-cash charge of approximately **$1 million** to **$2 million** in Q3 2024 related to lump-sum payments to participants[25](index=25&type=chunk)[26](index=26&type=chunk) - Final settlement of the plan's obligations is expected in the second half of fiscal 2025[27](index=27&type=chunk) [Leadership Team Appointments](index=8&type=section&id=Leadership%20Team) Carter's has appointed two new executives to its leadership team. Allison Peterson, formerly of Best Buy and Target, joins as Executive Vice President, Chief Retail & Digital Officer. Raghu Sagi, previously CIO at Inspire Brands and Sephora, joins as Executive Vice President, Chief Information & Technology Officer. Both appointments are expected to strengthen the company's performance, particularly in its profitable e-commerce business - Allison Peterson appointed as EVP, Chief Retail & Digital Officer[31](index=31&type=chunk) - Raghu Sagi appointed as EVP, Chief Information & Technology Officer[32](index=32&type=chunk) - The new leaders have extensive eCommerce experience, which is expected to strengthen that profitable component of the business[32](index=32&type=chunk) [Business Outlook](index=7&type=section&id=2024%20Business%20Outlook) The company has issued a revised outlook for the third quarter and full fiscal year 2024, reflecting continued macroeconomic pressures on consumer demand. The forecast anticipates lower sales and adjusted operating income compared to the prior year. To improve performance, Carter's plans to lower prices, increase marketing investments, and continue optimizing its store fleet [Third Quarter Fiscal 2024 Outlook](index=7&type=section&id=Third%20quarter%20of%20fiscal%202024) For Q3 2024, Carter's projects net sales between **$735 million** and **$755 million**, a decrease from **$792 million** in Q3 2023. Adjusted operating income is expected to be in the range of **$60 million** to **$70 million**, down from **$96 million** a year ago. Adjusted diluted EPS is forecasted to be between **$1.10** and **$1.35**, compared to **$1.84** in Q3 2023 | Q3 2024 Outlook | Projected Range | Q3 2023 Actual | | :--- | :--- | :--- | | Net Sales | $735M - $755M | $792M | | Adjusted Operating Income | $60M - $70M | $96M | | Adjusted Diluted EPS | $1.10 - $1.35 | $1.84 | [Full Year Fiscal 2024 Outlook](index=8&type=section&id=Fiscal%20year%202024) For the full fiscal year 2024, the company projects net sales of **$2.785 billion** to **$2.825 billion**, down from **$2.95 billion** in 2023. Adjusted operating income is forecasted to be between **$240 million** and **$260 million**, and adjusted diluted EPS is expected to be in the range of **$4.60** to **$5.05**. The company also anticipates operating cash flow to exceed **$200 million** | Full Year 2024 Outlook | Projected Range | FY 2023 Actual | | :--- | :--- | :--- | | Net Sales | $2.785B - $2.825B | $2.95B | | Adjusted Operating Income | $240M - $260M | $328M | | Adjusted Diluted EPS | $4.60 - $5.05 | $6.19 | | Operating Cash Flow | > $200M | N/A | | Capital Expenditures | ~$75M | N/A | - To improve performance, the company plans to lower prices to drive traffic, increase brand marketing investments, and continue store fleet optimization[31](index=31&type=chunk) [Financial Statements and Reconciliations](index=12&type=section&id=Financial%20Statements%20and%20Reconciliations) This section contains the detailed, unaudited financial tables for the second quarter and first half of fiscal 2024. It includes the Condensed Consolidated Statements of Operations, Business Segment Results, Balance Sheets, and Statements of Cash Flows. It also provides comprehensive reconciliations of GAAP results to the non-GAAP adjusted measures discussed throughout the report, such as Adjusted EBITDA and constant currency sales [Condensed Consolidated Statements of Operations](index=12&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) The statement of operations shows a decrease in net sales to **$564.4 million** in Q2 2024 from **$600.2 million** in Q2 2023. However, due to a larger reduction in the cost of goods sold, gross profit only slightly decreased. Operating income increased to **$39.5 million** from **$37.6 million**, and net income rose to **$27.6 million** from **$23.9 million** year-over-year | (In thousands) | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Net sales | $564,434 | $600,199 | | Gross profit | $282,937 | $291,896 | | Operating income | $39,452 | $37,561 | | Net income | $27,639 | $23,867 | [Business Segment Results](index=13&type=section&id=BUSINESS%20SEGMENT%20RESULTS) In Q2 2024, U.S. Retail sales were **$290.2 million** (down from **$323.5 million**), U.S. Wholesale sales were **$192.9 million** (up from **$186.9 million**), and International sales were **$81.3 million** (down from **$89.9 million**). U.S. Wholesale showed a significant increase in operating income margin to **18.8%** from **15.6%**, while U.S. Retail's margin declined to **6.2%** from **8.7%** | Net Sales (in thousands) | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | U.S. Retail | $290,249 | $323,466 | | U.S. Wholesale | $192,911 | $186,867 | | International | $81,274 | $89,866 | | **Consolidated** | **$564,434** | **$600,199** | | Operating Income Margin | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | U.S. Retail | 6.2% | 8.7% | | U.S. Wholesale | 18.8% | 15.6% | | International | 6.8% | 7.4% | [Condensed Consolidated Balance Sheets](index=14&type=section&id=CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) As of June 29, 2024, Carter's reported total assets of **$2.36 billion**. Cash and cash equivalents stood at **$316.6 million**, up from **$174.5 million** a year prior. Finished goods inventories were **$599.3 million**, a decrease from **$681.6 million** in the prior year. Total liabilities were **$1.54 billion**, and total stockholders' equity was **$811.8 million** | (In thousands) | June 29, 2024 | July 1, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $316,646 | $174,503 | | Finished goods inventories, net | $599,295 | $681,573 | | Total assets | $2,355,517 | $2,288,471 | | Total liabilities | $1,543,767 | $1,513,462 | | Total stockholders' equity | $811,750 | $775,009 | [Condensed Consolidated Statements of Cash Flows](index=15&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) For the first two quarters of 2024, net cash provided by operating activities was **$91.7 million**, a significant decrease from **$209.2 million** in the same period of 2023, primarily due to changes in finished goods inventories. Net cash used in investing activities was **$24.3 million**, and net cash used in financing activities was **$99.4 million**, mainly for dividends and share repurchases | (In thousands) | H1 2024 | H1 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $91,691 | $209,242 | | Net cash used in investing activities | ($24,315) | ($26,356) | | Net cash used in financing activities | ($99,357) | ($221,317) | | Net decrease in cash | ($34,567) | ($37,245) | [Reconciliation of GAAP to Adjusted Results](index=16&type=section&id=RECONCILIATION%20OF%20GAAP%20TO%20ADJUSTED%20RESULTS) This section provides detailed tables reconciling GAAP financial measures to non-GAAP adjusted figures. For Q2 and H1 2024, there were no adjustments to GAAP results. However, tables show adjustments made in 2023 for items like organizational restructuring. It also includes reconciliations for EBITDA, Adjusted EBITDA, and constant currency sales, providing transparency into management's view of core performance - No adjustments were made to GAAP results in the second quarter and first half of fiscal 2024[52](index=52&type=chunk) - For Q2 2023, GAAP diluted EPS of **$0.64** included a **$0.01** impact from organizational restructuring, resulting in an adjusted diluted EPS of **$0.64** (due to rounding)[50](index=50&type=chunk) - On a constant currency basis, Q2 2024 consolidated net sales declined by **5.9%** (vs. **6.0%** reported), and International segment sales declined by **9.1%** (vs. **9.6%** reported)[65](index=65&type=chunk)