Carter’s(CRI) - 2021 Q4 - Annual Report

PART I ITEM 1. BUSINESS Carter's, Inc. is North America's largest branded marketer of apparel for babies and young children, owning the Carter's, OshKosh B'gosh, and Skip Hop brands. The company operates a multi-channel global business model including retail stores, eCommerce, and wholesale, with a focus on value, brand reach, and profitability. Fiscal 2020 was significantly impacted by the COVID-19 pandemic, leading to disruptions in sales and supply chains - Carter's, Inc. is the largest branded marketer in North America for baby and young children's apparel, owning Carter's, OshKosh B'gosh, and Skip Hop brands[15] - The company's mission is to serve families with young children, aiming to be the world's favorite brands in young children's apparel and products[17] - Carter's brands hold the 1 market position with approximately 12% market share in the U.S. zero to 10-year-old apparel market, which is estimated at $24 billion[17] - The business operates through three segments: U.S. Retail, U.S. Wholesale, and International, utilizing retail stores, eCommerce, and wholesale channels globally[19] - Long-term growth strategy focuses on providing value and experience, extending brand reach, and improving profitability[20] - The COVID-19 pandemic negatively affected the global economy, supply chains, and consumer demand in fiscal 2020[19] Overview Our Brands Carter's & OshKosh B'gosh Licensed Products Skip Hop Our Sales Channels U.S. Retail U.S. Wholesale International Our Customer and Marketing Strategy Our Global Sourcing Network Corporate Social Responsibility Our Global Distribution Network Governmental Regulation Competition Seasonality and Weather Human Capital Resources Talent and Development Diversity and Inclusion Health and Safety Available Information ITEM 1A. RISK FACTORS The company faces various risks, including those related to global and macroeconomic conditions like the COVID-19 pandemic, which significantly impacted operations. Other risks include consumer spending sensitivity, brand and product value protection, intense market competition, reliance on major wholesale customers, challenges in retail store operations and eCommerce, inventory management, foreign currency fluctuations, and unseasonable weather. Litigation, cybersecurity threats, supply chain disruptions, international expansion difficulties, and regulatory changes also pose significant risks. Financial risks include debt obligations, tax fluctuations, and uncertainties regarding dividends and share repurchases - The COVID-19 pandemic has had and may continue to have a significant adverse effect on the business, financial condition, and results of operations, impacting global economy, supply chains, and consumer demand[78][79] - Business is sensitive to overall consumer spending levels, particularly in the young children's apparel market, which is affected by macroeconomic factors and birth rate fluctuations[81] - Failure to protect intellectual property rights could diminish brand value and competitive position[84][85] - The company operates in a highly competitive market, with some competitors having greater financial resources[89] - A significant portion of business is with wholesale customers; financial difficulties or loss of major customers could lead to material revenue loss[90][91] - eCommerce business faces risks related to system failures, telecommunications disruptions, reliance on third parties, and rapid technology changes[97] - Dependence on foreign supply sources, primarily in Asia, exposes the company to risks like political instability, natural disasters, trade regulations, and increased production costs[114][115] - The company has substantial debt ($1.00 billion outstanding as of fiscal 2020 end), which could limit future financing and operational flexibility[138][141] - Quarterly cash dividends and share repurchases were suspended in fiscal Q1 2020 due to COVID-19, and future decisions are subject to Board discretion and financial restrictions[149] Risks Related to Global and Macroeconomic Conditions Risks Related to Our Brands and Product Value Risks Related to Operating a Global Business Risk Relating to Litigation Risks Related to Cybersecurity, Data Privacy, and Information Technology Risks Related to our Global Supply Chain and Labor Force Risks Relating to Our International Expansion Risks Related to Governmental and Regulatory Changes Risks Related to Executing Our Strategic Plan Risks Related to Financial Reporting, Our Debt, and Tax GENERAL RISK ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments - No unresolved staff comments were reported[151] ITEM 2. PROPERTIES The company's principal properties include a 304,000 sq ft leased corporate headquarters in Atlanta, Georgia, regional headquarters in Mississauga, Ontario, and a principal sourcing office in Hong Kong. It operates two large leased distribution centers in Georgia (1.1M and 0.5M sq ft) and utilizes third-party logistics globally. As of fiscal 2020 end, the company operated 864 retail stores in the U.S., 193 in Canada, and 44 in Mexico, all under lease - Corporate headquarters: 304,000 sq ft leased space in Atlanta, Georgia (lease expires April 2030)[153] - Regional headquarters in Mississauga, Ontario (Canada) and principal sourcing office in Hong Kong, China[153] - Largest distribution centers (leased) in Braselton, Georgia (1.1 million sq ft) and Stockbridge, Georgia (0.5 million sq ft)[154] Retail Store Count (End of Fiscal 2020) | Location | Number of Leased Retail Stores | | :------------ | :----------------------------- | | United States | 864 | | Canada | 193 | | Mexico | 44 | - Average remaining lease term for retail stores in the U.S., Canada, and Mexico is approximately 3.8 years (excluding renewal options)[155] ITEM 3. LEGAL PROCEEDINGS The company is involved in various claims and lawsuits in the normal course of business but does not believe any current legal proceedings would have a material adverse effect on its financial position, results of operations, or cash flows - The Company is not currently a party to any legal proceedings believed to have a material adverse effect on its financial position, results of operations, or cash flows[156] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Mine Safety Disclosures are not applicable[156] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Carter's common stock (CRI) trades on the NYSE. As of February 19, 2021, the closing price was $92.54 with 44,053,137 shares outstanding. The company suspended its share repurchase program and quarterly cash dividend in Q1 2020 due to COVID-19, with future decisions subject to market conditions and financial performance. Total remaining capacity under repurchase authorizations was $650.4 million as of January 2, 2021 - Common stock (CRI) trades on the New York Stock Exchange[159] Common Stock Data (as of Feb 19, 2021) | Metric | Value | | :---------------------- | :----------- | | Closing Sale Price | $92.54 | | Shares Outstanding | 44,053,137 | | Holders of Record | 181 | - The company suspended its common stock share repurchase program and quarterly cash dividend in Q1 fiscal 2020 due to the COVID-19 pandemic[161][162] Share Repurchases and Dividends (Fiscal Years) | Metric | FY2020 | FY2019 | FY2018 | | :----------------------------------- | :---------- | :---------- | :---------- | | Number of shares repurchased | 474,684 | 2,107,472 | 1,879,529 | | Aggregate cost of shares repurchased | $45,255,000 | $196,910,000| $193,028,000| | Average price per share | $95.34 | $93.43 | $102.70 | | Dividend declared and paid per share | $0.60 | $2.00 | $1.80 | - Total remaining capacity under outstanding repurchase authorizations as of January 2, 2021, was approximately $650.4 million[160] - Provisions in the secured revolving credit facility restrict the ability to pay cash dividends or make future repurchases through Q3 fiscal 2021[164] Historical Stock Price and Number of Record Holders Open Market Share Repurchases Share Repurchase Program Dividends Recent Sales of Unregistered Securities ITEM 6. SELECTED FINANCIAL DATA This item is omitted at the registrant's option - Selected Financial Data is omitted at the registrant's option[166] ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides a detailed analysis of Carter's financial condition and results of operations for fiscal year 2020 compared to 2019, highlighting the significant adverse impact of the COVID-19 pandemic on sales, profitability, and liquidity. The company implemented various measures to enhance financial flexibility, including debt issuance, cost reductions, and suspension of shareholder returns. Despite challenges, strong eCommerce growth and inventory management helped mitigate some negative effects. The discussion also covers critical accounting policies and estimates - Fiscal year 2020 contained 53 calendar weeks, contributing approximately $32.1 million in incremental consolidated revenue[170] - The COVID-19 pandemic led to lower sales in retail and wholesale channels, temporary store closures, and disruptions in global supply chains[180][183] - To improve liquidity, the company drew $639.0 million under its revolving credit facility, amended the facility for covenant waivers, and issued $500 million in senior notes[180] - As of January 2, 2021, the company had $1.10 billion cash on hand and $745.0 million available under its revolving credit facility, totaling $1.85 billion in liquidity[182] - The company plans to close approximately 25% of its current stores, with over 100 closures by the end of fiscal 2021, shifting consumer preferences to eCommerce[180] - Organizational restructuring initiatives in fiscal 2020 included staffing model reorganization, function consolidation, and planned store closures, incurring $16.6 million in charges[256] Fiscal Years Our Business Segments Recent Developments Fiscal Year 2020 Highlights RESULTS OF OPERATIONS Consolidated Net Sales Gross Profit and Gross Margin Royalty Income Selling, General, and Administrative Expenses Goodwill Impairment Intangible Asset Impairment Operating Income Interest Expense Loss on Extinguishment of Debt Income Taxes Net Income Results by Segment - Fiscal Year 2020 (53 Weeks) compared to Fiscal Year 2019 (52 Weeks) Comparable Sales Metrics U.S. Retail U.S. Wholesale International Unallocated Corporate Expenses FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY Balance Sheet Cash Flow Net Cash Provided by Operating Activities Net Cash Used in Investing Activities Net Cash Provided by (Used in) Financing Activities Secured Revolving Credit Facility Terms of the Secured Revolving Credit Facility Senior Notes 2020 Issuance of Senior Notes 2019 Redemption and Issuance of Senior Notes Organizational Restructuring and Office Consolidation Share Repurchases Dividends Commitments Liquidity Outlook Seasonality CRITICAL ACCOUNTING POLICIES AND ESTIMATES Revenue Recognition and Accounts Receivable Allowance Inventory Goodwill and Tradename Accrued Expenses Loss Contingencies Accounting For Income Taxes Foreign Currency Employee Benefit Plans Stock-Based Compensation Arrangements ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risks primarily related to foreign currency exchange rates and interest rates. Fluctuations in the U.S. dollar against other currencies can impact production costs, sales, and financial results. Variable interest rates on the revolving credit facility also pose a risk, with a 1% change affecting annual pretax interest cost by approximately $2.1 million in fiscal 2020. The company may use foreign currency forward contracts to hedge certain exposures - The company faces market risks from foreign currency fluctuations and variable interest rates[305] - Foreign currency exchange rate changes negatively affected the International segment's net sales by approximately $4.7 million in fiscal 2020[308] - A 1% change in the effective interest rate on variable-rate borrowings ($212.2 million in FY2020) would impact annual pretax interest cost by approximately $2.1 million[311] - The company may use foreign currency forward contracts to hedge inventory purchases for Canadian and Mexican operations[310] Currency and Interest Rate Risks Currency Risk Interest Rate Risk Other Risks ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents the audited consolidated financial statements for Carter's, Inc. and its subsidiaries, including balance sheets, statements of operations, comprehensive income, cash flows, and changes in stockholders' equity for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018. It also includes the Report of Independent Registered Public Accounting Firm and extensive notes detailing significant accounting policies, the impact of COVID-19, revenue recognition, leases, property, goodwill and intangible assets, debt, common stock, stock-based compensation, employee benefit plans, income taxes, earnings per share, segment information, and fair value measurements - The consolidated financial statements for Carter's, Inc. and its subsidiaries are presented, covering fiscal years 2020, 2019, and 2018[319] - PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of January 2, 2021[320] Consolidated Net Sales and Net Income (FY2018-FY2020) | Metric | FY2020 (53 weeks) | FY2019 (52 weeks) | FY2018 (52 weeks) | | :---------- | :---------------- | :---------------- | :---------------- | | Net Sales | $3,024,334,000 | $3,519,286,000 | $3,462,269,000 | | Net Income | $109,717,000 | $263,802,000 | $282,068,000 | Key Balance Sheet Items (as of Jan 2, 2021 vs. Dec 28, 2019) | Item | Jan 2, 2021 ($ thousands) | Dec 28, 2019 ($ thousands) | | :------------------------ | :------------------------ | :------------------------- | | Cash and cash equivalents | 1,102,323 | 214,311 | | Total current assets | 1,946,024 | 1,107,757 | | Total assets | 3,392,580 | 2,753,117 | | Total current liabilities | 792,532 | 475,500 | | Long-term debt, net | 989,530 | 594,672 | | Total liabilities | 2,454,547 | 1,872,987 | | Total stockholders' equity| 938,033 | 880,130 | Cash Flow from Operating Activities (FY2018-FY2020) | Fiscal Year | Net Cash Provided by Operating Activities ($ thousands) | | :---------- | :------------------------------------------------------ | | 2020 | 589,894 | | 2019 | 387,215 | | 2018 | 356,198 | - Goodwill impairment charge of $17.7 million and intangible asset impairment charges of $26.5 million were recorded in fiscal 2020, primarily due to COVID-19 impacts[371] - The company adopted new accounting standards for Credit Losses (ASU 2016-13) and Goodwill Impairment Testing (ASU 2017-04) in fiscal 2020, with no material impact on financial statements[469][470] Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Cash Flows Consolidated Statements of Changes in Stockholders' Equity Notes to Consolidated Financial Statements NOTE 1 – THE COMPANY NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation Fiscal Year Use of Estimates in the Preparation of the Consolidated Financial Statements Revision of Previously Issued Financial Statements COVID-19 Foreign Currency Translation and Transactions Foreign Currency Contracts Cash and Cash Equivalents Concentration of Cash Deposits Risk Accounts Receivable Inventories Leases Property, Plant, and Equipment Internal-Use Software Goodwill and Other Intangible Assets Impairment of Other Long-Lived Assets Deferred Debt Issuance Costs Fair Value Measurements Revenue Recognition Costs of Goods Sold and Selling, General and Administrative Expenses Gross Profit Income from Royalties and License Fees Advertising Expenses Stock-Based Compensation Arrangements Income Taxes Supplemental Cash Flow Information Earnings Per Share Open Market Repurchases of Common Stock Employee Benefit Plans Facility Closure and Severance Costs Seasonality Recent Accounting Pronouncements NOTE 3 - REVENUE RECOGNITION Disaggregation of Revenue Accounts Receivable from Customers and Licensees Contract Assets and Liabilities Contract Liabilities NOTE 4 - LEASES NOTE 5 – PROPERTY, PLANT, AND EQUIPMENT NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS NOTE 7 – ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME NOTE 8 – LONG-TERM DEBT Secured Revolving Credit Facility Senior Notes NOTE 9 – COMMON STOCK Open Market Share Repurchases Dividends NOTE 10 – STOCK-BASED COMPENSATION Stock Options Restricted Stock Awards Time-based Restricted Stock Awards Performance-based Restricted Stock Awards Stock Awards NOTE 11 – EMPLOYEE BENEFIT PLANS OshKosh B'Gosh Pension Plan Post-retirement Life and Medical Plan Deferred Compensation Plan Defined Contribution Plan NOTE 12 – INCOME TAXES Provision for Income Taxes Effective Rate Reconciliation Deferred Taxes Uncertain Tax Positions NOTE 13 – EARNINGS PER SHARE NOTE 14 – SEGMENT INFORMATION Additional Data by Segment Geographical Data NOTE 15 – FAIR VALUE MEASUREMENTS Investments Foreign Exchange Forward Contracts Borrowings Impairment of Long-Lived Tangible assets Goodwill and Intangible Assets NOTE 16 – OTHER CURRENT LIABILITIES NOTE 17 - ORGANIZATIONAL RESTRUCTURING AND OFFICE CONSOLIDATION NOTE 18 – COMMITMENTS AND CONTINGENCIES ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure were reported[650] ITEM 9A. CONTROLS AND PROCEDURES Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of January 2, 2021. The internal control over financial reporting was also assessed as effective based on the COSO 2013 framework, and PricewaterhouseCoopers LLP provided an attestation report confirming this effectiveness. No material changes in internal control over financial reporting occurred in Q4 fiscal 2020 - Disclosure controls and procedures were effective as of January 2, 2021[650] - Management concluded that internal control over financial reporting was effective as of January 2, 2021, based on the COSO 2013 framework[653] - PricewaterhouseCoopers LLP audited and attested to the effectiveness of internal control over financial reporting[654] - No material changes in internal control over financial reporting occurred during the fourth quarter of fiscal 2020[655] ITEM 9B. OTHER INFORMATION This item is not applicable - Other Information is not applicable[656] PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors and executive officers is incorporated by reference from the definitive proxy statement for the Annual Meeting of Stockholders scheduled for May 20, 2021 - Information on Directors and Executive Officers is incorporated by reference from the definitive proxy statement for the Annual Meeting of Stockholders on May 20, 2021[659] ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference from the definitive proxy statement - Information on Executive Compensation is incorporated by reference from the definitive proxy statement[660] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS This section provides information on equity compensation plans and security ownership, with additional details incorporated by reference from the definitive proxy statement. As of the most recent fiscal year-end, 860,711 securities were to be issued upon exercise of outstanding options, warrants, and rights, with a weighted-average exercise price of $84.31. There were 3,293,796 securities remaining available for future issuance under equity compensation plans Equity Compensation Plan Information (Most Recent Fiscal Year End) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted-average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans | | :---------------------------------------------- | :----------------------------------------------------------------------------------------- | :--------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 860,711 | $84.31 | 3,293,796 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 860,711 | $84.31 | 3,293,796 | - Additional information is incorporated by reference from the definitive proxy statement[661] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated by reference from the definitive proxy statement - Information on Certain Relationships and Related Transactions is incorporated by reference from the definitive proxy statement[662] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is incorporated by reference from the definitive proxy statement - Information on Principal Accountant Fees and Services is incorporated by reference from the definitive proxy statement[663] PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists the financial statements filed as part of the report, including the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Income, Cash Flows, Changes in Stockholders' Equity, and Notes to Consolidated Financial Statements. It also provides a comprehensive list of exhibits, including organizational documents, debt indentures, credit agreements, and equity compensation plans, with references to their previous filings - Financial statements filed as part of this report include Consolidated Balance Sheets, Statements of Operations, Comprehensive Income, Cash Flows, and Changes in Stockholders' Equity[666] - The section lists various exhibits, such as the Certificate of Incorporation, Amended and Restated By-laws, Specimen Certificate of Common Stock, Indentures for Senior Notes (2025 and 2027), and the Fourth Amended and Restated Credit Agreement[666][667][668] - Exhibits also include amendments to the credit agreement, severance plans, equity incentive plans, and XBRL documents[668][669][671] ITEM 16. FORM 10-K SUMMARY This item is omitted at the registrant's option - Form 10-K Summary is omitted at the registrant's option[673] SIGNATURES The report is signed by Michael D. Casey, Chairman and Chief Executive Officer, and Richard F. Westenberger, Executive Vice President and Chief Financial Officer, along with other directors, on February 26, 2021, certifying compliance with the Securities Exchange Act of 1934 - The report was signed by Michael D. Casey (Chairman and CEO) and Richard F. Westenberger (EVP and CFO) on February 26, 2021[678][680] - Signatures certify compliance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934[676]