Carter’s(CRI) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides a comprehensive overview of the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the period ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements of Carter's, Inc. for the period ended September 30, 2023, including balance sheets, statements of operations, comprehensive income, changes in stockholders' equity, and cash flows, along with accompanying notes detailing accounting policies, revenue recognition, debt, and segment information Unaudited Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific points in time Balance Sheet Summary | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Oct 1, 2022 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $169,106 | $211,748 | $121,649 | | Accounts receivable, net | $240,507 | $198,587 | $265,593 | | Finished goods inventories, net | $620,669 | $744,573 | $899,326 | | Total current assets | $1,067,886 | $1,188,720 | $1,346,532 | | Total assets | $2,319,806 | $2,439,715 | $2,597,953 | | Total current liabilities | $464,197 | $528,949 | $552,005 | | Long-term debt, net | $567,168 | $616,624 | $736,448 | | Total liabilities | $1,534,495 | $1,643,306 | $1,809,751 | | Total stockholders' equity | $785,311 | $796,409 | $788,202 | - Inventories decreased by $278.7 million (31.0%) from October 1, 2022, to September 30, 2023, primarily due to decreased in-transit and 'pack and hold' inventory, and lower forecasted net sales[33] Unaudited Condensed Consolidated Statements of Operations This statement outlines the company's financial performance over specific periods, presenting net sales, gross profit, operating income, and net income Statements of Operations Summary | Metric (in thousands) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :-------------------- | :------ | :------ | :------- | :------- | | Net sales | $791,651 | $818,624 | $2,087,730 | $2,300,603 | | Gross profit | $376,397 | $370,528 | $977,760 | $1,056,809 | | Operating income | $93,430 | $91,583 | $187,345 | $269,625 | | Net income | $66,127 | $64,957 | $125,990 | $169,859 | | Diluted EPS | $1.78 | $1.67 | $3.36 | $4.26 | | Dividend per share | $0.75 | $0.75 | $2.25 | $2.25 | - For Q3 2023, net sales decreased by 3.3% YoY, while gross profit increased by 1.6% and net income increased by 1.8% YoY. Diluted EPS rose by 6.6% YoY[12][92] - For the first three quarters of fiscal 2023, net sales decreased by 9.3% YoY, operating income decreased by 30.5% YoY, and net income decreased by 25.8% YoY. Diluted EPS fell by 21.1% YoY[12][119] Unaudited Condensed Consolidated Statements of Comprehensive Income This statement presents the company's total comprehensive income, including net income and other comprehensive income items like foreign currency translation adjustments Statements of Comprehensive Income Summary | Metric (in thousands) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :-------------------- | :------ | :------ | :------- | :------- | | Net income | $66,127 | $64,957 | $125,990 | $169,859 | | Foreign currency translation adjustments | $(4,179) | $(8,372) | $5,196 | $(11,677) | | Comprehensive income | $61,948 | $56,585 | $131,186 | $158,182 | - Comprehensive income for Q3 2023 increased to $61.9 million from $56.6 million in Q3 2022, primarily due to higher net income and reduced foreign currency translation losses[15] Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity This statement details the changes in the company's equity accounts over specific periods, reflecting transactions with owners and comprehensive income Statements of Changes in Stockholders' Equity Summary | Metric (in thousands) | Balance at Oct 1, 2022 | Balance at Sep 30, 2023 | | :-------------------- | :--------------------- | :---------------------- | | Common stock - $ | $385 | $370 | | Accumulated other comprehensive loss | $(40,575) | $(29,142) | | Retained earnings | $828,392 | $814,083 | | Total stockholders' equity | $788,202 | $785,311 | - Total stockholders' equity slightly decreased from $788.2 million at October 1, 2022, to $785.3 million at September 30, 2023, influenced by share repurchases and dividends, partially offset by comprehensive income[18][20] Unaudited Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods Cash Flow Activities Summary | Cash Flow Activity (in thousands) | YTD Sep 30, 2023 | YTD Oct 1, 2022 | | :-------------------------------- | :--------------- | :-------------- | | Net cash provided by (used in) operating activities | $205,790 | $(217,480) | | Net cash used in investing activities | $(42,470) | $(26,862) | | Net cash used in financing activities | $(206,618) | $(616,404) | | Net decrease in cash and cash equivalents | $(42,642) | $(862,645) | | Cash and cash equivalents, end of period | $169,106 | $121,649 | - Net cash provided by operating activities significantly improved to $205.8 million for the first three quarters of fiscal 2023, compared to net cash used of $217.5 million in the prior year, driven by favorable working capital changes and inventory reductions[154] - Net cash used in investing activities increased to $42.5 million, primarily due to higher capital expenditures for retail store openings, remodels, information technology, and distribution facilities[155][156] Notes to the Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements, clarifying accounting policies and significant transactions NOTE 1 – THE COMPANY This note describes Carter's, Inc.'s core business, brands, and distribution channels as a leading marketer of children's apparel - Carter's, Inc. designs, sources, and markets branded childrenswear under various brands including Carter's, OshKosh B'gosh, Skip Hop, Child of Mine, Just One You, Simple Joys, and Little Planet[26] - Products are distributed wholesale to department stores and retailers, and sold through the Company's own retail stores and eCommerce sites[26] NOTE 2 – BASIS OF PRESENTATION This note outlines the accounting principles used in preparing the financial statements, including U.S. GAAP compliance and inventory valuation methods - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC rules, including normal and recurring adjustments[28][29] - Inventories are stated at the lower of cost (FIFO for wholesale, average cost for retail) or net realizable value, with a 31.0% decrease in inventories from October 1, 2022, to September 30, 2023[33] NOTE 3 - REVENUE RECOGNITION This note details the company's revenue recognition policies and disaggregates net sales by major revenue sources and geographic segments Net Sales by Revenue Source (Q3 2023) | Revenue Source (Q3 2023, in thousands) | U.S. Retail | U.S. Wholesale | International | Total | | :------------------------------------- | :---------- | :------------- | :------------ | :---- | | Wholesale channel | $— | $300,338 | $45,842 | $346,180 | | Direct-to-consumer | $374,796 | $— | $70,675 | $445,471 | | Total Net Sales | $374,796 | $300,338 | $116,517 | $791,651 | | Royalty income, net | $2,236 | $3,147 | $330 | $5,713 | Net Sales by Revenue Source (YTD Sep 30, 2023) | Revenue Source (YTD Sep 30, 2023, in thousands) | U.S. Retail | U.S. Wholesale | International | Total | | :---------------------------------------------- | :---------- | :------------- | :------------ | :---- | | Wholesale channel | $— | $767,194 | $117,547 | $884,741 | | Direct-to-consumer | $1,021,983 | $— | $181,006 | $1,202,989 | | Total Net Sales | $1,021,983 | $767,194 | $298,553 | $2,087,730 | | Royalty income, net | $5,746 | $8,694 | $2,133 | $16,573 | NOTE 4 – ACCUMULATED OTHER COMPREHENSIVE LOSS This note provides a breakdown of the components of accumulated other comprehensive loss, primarily focusing on foreign currency translation adjustments and pension obligations Accumulated Other Comprehensive Loss Components | Component (in thousands) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :----------------------- | :----------- | :----------- | :---------- | | Cumulative foreign currency translation adjustments | $(23,630) | $(28,826) | $(32,980) | | Pension and post-retirement obligations | $(5,512) | $(5,512) | $(7,595) | | Total accumulated other comprehensive loss | $(29,142) | $(34,338) | $(40,575) | - The total accumulated other comprehensive loss decreased from $(40.6) million at October 1, 2022, to $(29.1) million at September 30, 2023, primarily due to favorable foreign currency translation adjustments[48] NOTE 5 – COMMON STOCK This note details transactions related to common stock, including share repurchases and cash dividends declared and paid Share Repurchase Activity | Share Repurchases | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :---------------- | :------ | :------ | :------- | :------- | | Number of shares repurchased | 390,004 | 877,119 | 975,358 | 2,942,481 | | Aggregate cost (in thousands) | $27,570 | $65,445 | $67,492 | $241,751 | | Average price per share | $70.69 | $74.61 | $69.20 | $82.16 | - The Company repurchased 390,004 shares for $27.6 million in Q3 2023, and 975,358 shares for $67.5 million YTD 2023. Remaining repurchase capacity was approximately $682.0 million as of September 30, 2023[50][51] - Cash dividends of $0.75 per common share were declared and paid in each of the first three quarters of fiscal 2023 and 2022, totaling $2.25 per share YTD[54] NOTE 6 – LONG-TERM DEBT This note describes the company's long-term debt structure, including senior notes and the secured revolving credit facility, and associated terms Long-Term Debt Components | Debt Component (in thousands) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :---------------------------- | :----------- | :----------- | :---------- | | Senior notes, net | $497,168 | $496,624 | $496,448 | | Secured revolving credit facility | $70,000 | $120,000 | $240,000 | | Total long-term debt, net | $567,168 | $616,624 | $736,448 | - Total long-term debt, net, decreased to $567.2 million at September 30, 2023, from $736.4 million at October 1, 2022, primarily due to reduced borrowings under the secured revolving credit facility[56] - As of September 30, 2023, $70.0 million was outstanding under the secured revolving credit facility, with $775.6 million available for future borrowing. The weighted-average borrowing rate was 6.55%[57][60] NOTE 7 – STOCK-BASED COMPENSATION This note outlines the nature and amount of stock-based compensation expense recognized for various equity awards Stock-Based Compensation Expense | Stock-Based Compensation (in thousands) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :-------------------------------------- | :------ | :------ | :------- | :------- | | Stock options | $— | $8 | $— | $186 | | Restricted stock: Time-based awards | $4,353 | $4,506 | $12,898 | $13,961 | | Restricted stock: Performance-based awards | $(425) | $489 | $464 | $1,368 | | Stock awards | $— | $— | $1,550 | $1,706 | | Total | $3,928 | $5,003 | $14,912 | $17,221 | - Total stock-based compensation expense for Q3 2023 was $3.9 million, down from $5.0 million in Q3 2022. YTD 2023 expense was $14.9 million, down from $17.2 million YTD 2022[61] - Performance target estimate revisions for certain performance-based grants resulted in a reversal of $1.1 million in Q3 2023 and $1.5 million YTD 2023[61] NOTE 8 – INCOME TAXES This note provides information on the company's income tax provisions, including unrecognized income tax benefits and their potential impact - As of September 30, 2023, gross unrecognized income tax benefits were approximately $9.5 million, with $6.5 million potentially affecting the effective income tax rate[62] - Approximately $2.4 million of reserves for unrecognized tax benefits are expected to expire within the next 12 months[63] NOTE 9 – FAIR VALUE MEASUREMENTS This note describes the valuation methodologies and fair value hierarchy applied to the company's financial instruments and certain non-financial assets - Marketable securities, primarily equity-based mutual funds, had an aggregate fair value of approximately $16.4 million at September 30, 2023, classified as Level 1 within the fair value hierarchy[65] - The fair value of the Company's $500.0 million senior notes was approximately $481.4 million at September 30, 2023, estimated using secondary market quoted prices (Level 2)[67] - Impairment charges of $9.0 million were recorded in Q4 2022 on the Skip Hop tradename asset across U.S. Wholesale, International, and U.S. Retail segments[69] NOTE 10 – EARNINGS PER SHARE This note presents the calculation of basic and diluted earnings per common share for various periods Earnings Per Share | EPS Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--------- | :------ | :------ | :------- | :------- | | Basic EPS | $1.78 | $1.67 | $3.36 | $4.26 | | Diluted EPS | $1.78 | $1.67 | $3.36 | $4.26 | - Diluted net income per common share increased to $1.78 in Q3 2023 from $1.67 in Q3 2022, but decreased to $3.36 YTD 2023 from $4.26 YTD 2022[70] NOTE 11 – OTHER CURRENT LIABILITIES This note provides a detailed breakdown of the company's other current liabilities, including unredeemed gift cards and accrued employee benefits Other Current Liabilities Breakdown | Liability (in thousands) | Sep 30, 2023 | Dec 31, 2022 | Oct 1, 2022 | | :----------------------- | :----------- | :----------- | :---------- | | Unredeemed gift cards | $23,983 | $23,303 | $21,217 | | Accrued employee benefits | $17,433 | $16,356 | $14,131 | | Accrued bonuses and incentive compensation | $12,184 | $7,244 | $1,260 | | Income taxes payable | $6,341 | $17,484 | $7,911 | | Total other current liabilities | $106,122 | $122,439 | $92,394 | - Accrued bonuses and incentive compensation significantly increased to $12.2 million at September 30, 2023, from $1.3 million at October 1, 2022[71] NOTE 12 – COMMITMENTS AND CONTINGENCIES This note discloses the company's various commitments and contingencies, including legal proceedings, and assesses their potential financial impact - The Company is subject to various claims and lawsuits in the normal course of business but does not believe any current legal proceedings would have a material adverse impact on its financial position, results of operations, or cash flows[72][183] NOTE 13 – SEGMENT INFORMATION This note provides financial information by the company's operating segments, including net sales and operating income for U.S. Retail, U.S. Wholesale, and International operations Segment Net Sales (Q3) | Segment Net Sales (Q3, in thousands) | Sep 30, 2023 | % of Consolidated Net Sales | Oct 1, 2022 | % of Consolidated Net Sales | | :----------------------------------- | :----------- | :-------------------------- | :---------- | :-------------------------- | | U.S. Retail | $374,796 | 47.3% | $408,209 | 49.9% | | U.S. Wholesale | $300,338 | 38.0% | $288,454 | 35.2% | | International | $116,517 | 14.7% | $121,961 | 14.9% | | Consolidated Net Sales | $791,651 | 100.0% | $818,624 | 100.0% | Segment Operating Income (Q3) | Segment Operating Income (Q3, in thousands) | Sep 30, 2023 | % of Segment Net Sales | Oct 1, 2022 | % of Segment Net Sales | | :------------------------------------------ | :----------- | :--------------------- | :---------- | :--------------------- | | U.S. Retail | $47,983 | 12.8% | $57,723 | 14.1% | | U.S. Wholesale | $65,702 | 21.9% | $39,989 | 13.9% | | International | $13,379 | 11.5% | $17,113 | 14.0% | | Corporate expenses | $(33,634) | n/a | $(23,242) | n/a | | Consolidated Operating Income | $93,430 | 11.8% | $91,583 | 11.2% | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the Company's financial performance and condition, highlighting macroeconomic challenges, strategic responses, and detailed results for the third fiscal quarter and first three fiscal quarters of 2023, segmented by U.S. Retail, U.S. Wholesale, and International operations FORWARD-LOOKING STATEMENTS This section cautions readers about inherent uncertainties and risks associated with forward-looking statements, including global economic conditions and consumer behavior - The report contains forward-looking statements subject to risks and uncertainties, including global economic conditions, inflation, supply chain constraints, geopolitical conflicts, and consumer spending habits[75] OVERVIEW This section provides a high-level description of Carter's, Inc.'s business, market position, and multi-channel global operating model - Carter's, Inc. is North America's largest branded marketer of young children's apparel, owning brands like Carter's, OshKosh B'gosh, Skip Hop, and exclusive brands for major retailers[76][77][78] - The Company operates a multi-channel, global business model with 1,009 company-owned retail stores, approximately 19,350 wholesale locations, and eCommerce sites in North America, plus international operations in over 90 countries[80] Segments This section defines the company's three reportable segments: U.S. Retail, U.S. Wholesale, and International operations - The Company operates through three reportable segments: U.S. Retail (retail stores and eCommerce in the U.S.), U.S. Wholesale (sales to wholesale partners in the U.S.), and International (sales outside the U.S., including Canada and Mexico retail/eCommerce and international wholesale/licensees)[82] Gross Profit and Gross Margin This section explains the components of gross profit and gross margin, including costs directly related to merchandise and sales - Gross profit is consolidated net sales less cost of goods sold, which includes merchandising, design, procurement, inbound freight, purchasing, receiving, and inspection costs, as well as eCommerce shipping to end consumers[83] - Retail store occupancy, distribution expenses, and most other expenses are classified under Selling, General, and Administrative (SG&A) expenses[83] Recent Developments This section highlights key business and financial developments impacting the company, including macroeconomic factors and strategic initiatives Macroeconomic Factors, Consumer Demand, and Inventories This section discusses the impact of macroeconomic conditions on consumer demand and the company's inventory management strategies - Macroeconomic factors such as inflation, increased interest rates, consumer debt, and geopolitical unrest negatively impacted consumer demand in Q3 2023 and are expected to continue affecting demand[84] - Inventories decreased by $278.7 million (31.0%) to $620.7 million compared to Q3 2022, primarily due to reduced in-transit and 'pack and hold' inventory, and lower forecasted net sales[85] Inflationary Pressures This section addresses the ongoing impact of inflationary pressures on input costs and the company's mitigation efforts - The Company continued to experience inflationary pressures on input costs through Q3 2023, despite decreased freight costs. These pressures were partially offset by price increases, product cost optimization, and supplier diversification[86] Organizational Restructuring and Corporate Office Lease Amendment This section details the financial impact of organizational changes and a corporate office lease amendment - Organizational restructuring initiatives in Q1 and Q3 2023 incurred costs of $2.9 million in Q3 and $6.2 million YTD, primarily for severance[87] - An amendment to the corporate headquarters lease in Q1 2023, reducing leased space, resulted in a net gain of $1.8 million[88] Third Fiscal Quarter 2023 Financial Highlights This section summarizes the key financial performance indicators and strategic actions for the third fiscal quarter of 2023 - Consolidated net sales decreased by 3.3% to $791.7 million due to macroeconomic factors, but operating income increased by 2.0% to $93.4 million, with operating margin rising 60 bps to 11.8%[90] - The Company opened 6 new stores and closed 1 in the U.S. during Q3 2023, with plans for approximately 25 more openings in the remainder of fiscal 2023[90] - Returned $55.4 million to shareholders in Q3 2023 ($27.6 million in share repurchases and $27.9 million in cash dividends), totaling $152.0 million YTD[90] RESULTS OF OPERATIONS This section provides a detailed analysis of the company's financial performance, comparing current and prior period results THIRD FISCAL QUARTER ENDED SEPTEMBER 30, 2023 COMPARED TO THIRD FISCAL QUARTER ENDED OCTOBER 1, 2022 This section analyzes the company's consolidated financial performance for the third fiscal quarter of 2023 compared to the same period in the prior year Consolidated Financial Performance (Q3) | Metric (in thousands) | Sep 30, 2023 | Oct 1, 2022 | $ Change | % / bps Change | | :-------------------- | :----------- | :---------- | :------- | :------------- | | Net sales | $791,651 | $818,624 | $(26,973) | (3.3)% | | Gross profit | $376,397 | $370,528 | $5,869 | 1.6% | | Gross profit as % of net sales | 47.5% | 45.3% | | 220 bps | | Operating income | $93,430 | $91,583 | $1,847 | 2.0% | | Operating income as % of net sales | 11.8% | 11.2% | | 60 bps | | Net income | $66,127 | $64,957 | $1,170 | 1.8% | | Diluted net income per common share | $1.78 | $1.67 | $0.11 | 6.6% | - Net sales decreased by 3.3% due to macroeconomic factors and lower consumer demand, partially offset by improved price realization[94] - Gross profit increased by 1.6% and gross margin by 220 bps, driven by decreased inventory provisions, increased average selling prices, and lower ocean freight rates[95] - SG&A expenses increased by 0.9% and as a percentage of net sales by 150 bps, primarily due to fixed cost deleverage, increased performance-based compensation, and organizational restructuring charges[97] Results by Segment - Third Quarter of Fiscal 2023 compared to Third Quarter of Fiscal 2022 This section provides a detailed comparison of net sales and operating income across the company's segments for the third fiscal quarter Segment Net Sales (Q3) | Segment Net Sales (Q3, in thousands) | Sep 30, 2023 | Oct 1, 2022 | $ Change | % Change | | :----------------------------------- | :----------- | :---------- | :------- | :------- | | U.S. Retail | $374,796 | $408,209 | $(33,413) | (8.2)% | | U.S. Wholesale | $300,338 | $288,454 | $11,884 | 4.1% | | International | $116,517 | $121,961 | $(5,444) | (4.5)% | Segment Operating Income (Q3) | Segment Operating Income (Q3, in thousands) | Sep 30, 2023 | Oct 1, 2022 | $ Change | % Change | | :------------------------------------------ | :----------- | :---------- | :------- | :------- | | U.S. Retail | $47,983 | $57,723 | $(9,740) | (16.9)% | | U.S. Wholesale | $65,702 | $39,989 | $25,713 | 64.3% | | International | $13,379 | $17,113 | $(3,734) | (21.8)% | | Unallocated corporate expenses | $(33,634) | $(23,242) | $(10,392) | 44.7% | - U.S. Retail net sales decreased by 8.2% and operating income by 16.9% due to lower consumer demand and traffic. Comparable net sales decreased by 9.9%[107][108][109] - U.S. Wholesale net sales increased by 4.1% and operating income by 64.3%, driven by timing of shipments and increased average selling prices, with operating margin up 800 bps[110][111] - International net sales decreased by 4.5% and operating income by 21.8%, primarily due to decreased sales in Canada, partially offset by growth in Mexico[112][113][115] THREE FISCAL QUARTERS ENDED SEPTEMBER 30, 2023 COMPARED TO THREE FISCAL QUARTERS ENDED OCTOBER 1, 2022 This section analyzes the company's consolidated financial performance for the first three fiscal quarters of 2023 compared to the same period in the prior year Consolidated Financial Performance (YTD) | Metric (in thousands) | YTD Sep 30, 2023 | YTD Oct 1, 2022 | $ Change | % / bps Change | | :-------------------- | :--------------- | :-------------- | :------- | :------------- | | Net sales | $2,087,730 | $2,300,603 | $(212,873) | (9.3)% | | Gross profit | $977,760 | $1,056,809 | $(79,049) | (7.5)% | | Gross profit as % of net sales | 46.8% | 45.9% | | 90 bps | | Operating income | $187,345 | $269,625 | $(82,280) | (30.5)% | | Operating income as % of net sales | 9.0% | 11.7% | | (270) bps | | Net income | $125,990 | $169,859 | $(43,869) | (25.8)% | | Diluted net income per common share | $3.36 | $4.26 | $(0.90) | (21.1)% | - YTD net sales decreased by 9.3% due to macroeconomic factors and lower consumer demand, despite increased average selling prices[121] - YTD gross profit decreased by 7.5%, but gross margin increased by 90 bps, driven by increased average selling prices, decreased fabric purchase commitment charges, inventory provisions, and lower air freight costs[122] - YTD operating income decreased by 30.5% and operating margin by 270 bps, primarily due to fixed cost deleverage on decreased sales and increased SG&A expenses[124][125] Results by Segment - First Three Quarters of Fiscal 2023 compared to First Three Quarters of Fiscal 2022 This section provides a detailed comparison of net sales and operating income across the company's segments for the first three fiscal quarters Segment Net Sales (YTD) | Segment Net Sales (YTD, in thousands) | Sep 30, 2023 | Oct 1, 2022 | $ Change | % Change | | :------------------------------------ | :----------- | :---------- | :------- | :------- | | U.S. Retail | $1,021,983 | $1,153,664 | $(131,681) | (11.4)% |\n| U.S. Wholesale | $767,194 | $819,772 | $(52,578) | (6.4)% |\n| International | $298,553 | $327,167 | $(28,614) | (8.7)% | Segment Operating Income (YTD) | Segment Operating Income (YTD, in thousands) | Sep 30, 2023 | Oct 1, 2022 | $ Change | % Change | | :------------------------------------------- | :----------- | :---------- | :------- | :------- | | U.S. Retail | $103,132 | $163,257 | $(60,125) | (36.8)% | | U.S. Wholesale | $147,003 | $134,088 | $12,915 | 9.6% | | International | $23,193 | $39,665 | $(16,472) | (41.5)% | | Unallocated corporate expenses | $(85,983) | $(67,385) | $(18,598) | 27.6% | - YTD U.S. Retail net sales decreased by 11.4% and operating income by 36.8% due to lower consumer demand and increased SG&A rate[133][134] - YTD U.S. Wholesale net sales decreased by 6.4%, but operating income increased by 9.6%, with operating margin up 280 bps, driven by improved gross margin and decreased SG&A rate[135][136] - YTD International net sales decreased by 8.7% and operating income by 41.5%, impacted by decreased sales in Canada and international wholesale, and a strengthening U.S. Dollar[138][140] RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP MEASURES This section reconciles non-GAAP financial measures, such as adjusted operating income and net income, to their most directly comparable GAAP equivalents Reconciliation of Non-GAAP Measures (Q3 2023) | (In millions, except EPS) | Operating Income | % Net Sales | Income Taxes | Net Income | Diluted Net Common Share | | :------------------------ | :--------------- | :---------- | :----------- | :--------- | :----------------------- | | Q3 2023 As reported (GAAP) | $93.4 | 11.8% | $19.2 | $66.1 | $1.78 | | Organizational restructuring | $2.9 | | $0.7 | $2.2 | $0.06 | | Q3 2023 As adjusted | $96.3 | 12.2% | $19.9 | $68.4 | $1.84 | Reconciliation of Non-GAAP Measures (YTD 2023) | (In millions, except EPS) | Operating Income | % Net Sales | Income Taxes | Net Income | Diluted Net Common Share | | :------------------------ | :--------------- | :---------- | :----------- | :--------- | :----------------------- | | YTD 2023 As reported (GAAP) | $187.3 | 9.0% | $38.3 | $126.0 | $3.36 | | Organizational restructuring | $4.4 | | $1.0 | $3.4 | $0.09 | | YTD 2023 As adjusted | $191.8 | 9.2% | $39.3 | $129.4 | $3.45 | - Adjusted operating income for Q3 2023 was $96.3 million (12.2% of net sales) and YTD 2023 was $191.8 million (9.2% of net sales), after excluding organizational restructuring charges[143][145] FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY This section discusses the company's overall financial health, including its balance sheet, cash flows, and available capital resources and liquidity - The Company's primary liquidity sources are cash on hand ($169.1 million as of Sep 30, 2023), cash flow from operations, and available borrowing capacity under its secured revolving credit facility ($775.6 million available)[147][149][158] - Macroeconomic factors, including inflationary pressures and declining consumer sentiment, are expected to continue impacting financial results[148] Balance Sheet This section analyzes key changes in the company's balance sheet items, including accounts receivable, inventories, and accounts payable - Net accounts receivable decreased by $25.1 million (9.4%) from October 1, 2022, to September 30, 2023, reflecting decreased net sales and timing of wholesale customer shipments[150] - Inventories decreased by $278.7 million (31.0%) to $620.7 million, primarily due to reduced in-transit and 'pack and hold' inventory and lower forecasted net sales[151] - Accounts payable decreased by $95.8 million (30.1%) to $222.2 million, mainly due to decreased in-transit inventory and associated accruals[152] Cash Flow This section provides an analysis of the company's cash flows from operating, investing, and financing activities - Net cash provided by operating activities significantly improved to $205.8 million YTD 2023, a significant improvement from $217.5 million used YTD 2022, driven by favorable working capital changes and inventory reductions[154] - Net cash used in investing activities increased to $42.5 million YTD 2023, primarily due to higher capital expenditures for retail store openings/remodels, IT, and distribution facilities[155][156] - Net cash used in financing activities decreased to $206.6 million YTD 2023 from $616.4 million YTD 2022, mainly due to the early extinguishment of senior notes in 2022 and decreased common stock repurchases[157] Secured Revolving Credit Facility This section details the company's secured revolving credit facility, including outstanding borrowings and available capacity - As of September 30, 2023, $70.0 million was outstanding under the secured revolving credit facility, with $775.6 million available for future borrowing. The applicable borrowing rate was approximately 6.55%[158][159] - The Company was in compliance with all financial and other covenants under the facility as of September 30, 2023[159] Senior Notes This section describes the company's outstanding senior notes, including principal amount, interest rate, and maturity date - The Company had $500.0 million principal amount of senior notes outstanding as of September 30, 2023, bearing interest at 5.625% per annum and maturing on March 15, 2027[160] Share Repurchases This section provides details on the company's share repurchase program, including shares bought back and remaining authorization - YTD 2023, the Company repurchased 975,358 shares for approximately $67.5 million, at an average price of $69.20 per share[161] - Remaining capacity under outstanding repurchase authorizations was approximately $682.0 million as of September 30, 2023, with no expiration date[162] Dividends This section outlines the company's dividend policy and declarations, including per-share amounts and future considerations - Cash dividends of $0.75 per common share were paid in each of the first three quarters of fiscal 2023 and 2022, totaling $2.25 per share YTD[164] - Future dividend declarations will be evaluated based on business conditions, financial performance, and restrictions under the secured revolving credit facility[165][166] Seasonality This section explains the impact of seasonal fluctuations on the company's sales and profitability - The Company experiences seasonal fluctuations in sales and profitability, with lower sales and gross profit typically in the first half of the fiscal year[167] CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section highlights the accounting policies and estimates that require significant management judgment and are crucial to the financial statements - Critical accounting policies and estimates, including revenue recognition, inventory, goodwill, accrued expenses, and income taxes, require significant management judgment and are consistent with those described in the 2022 Annual Report on Form 10-K[168][169] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the Company's exposure to market risks, specifically foreign currency and interest rate risks, and outlines strategies for managing these exposures Currency and Interest Rate Risks This section discusses the company's exposure to fluctuations in foreign currency exchange rates and interest rates on its variable-rate debt - The Company is exposed to market risks related to foreign currency fluctuations and interest rates on its variable-rate debt[170] Currency Risk This section analyzes the impact of foreign currency exchange rate changes on consolidated net sales and comprehensive income - Foreign currency exchange rate changes had a favorable effect of approximately $1.2 million on consolidated net sales in Q3 2023, but an unfavorable effect of approximately $2.2 million YTD 2023[174] - Foreign currency translation adjustments are included in Accumulated other comprehensive income (loss), while transaction gains and losses are recorded in Other (income) expense, net[173][175] Interest Rate Risk This section assesses the potential impact of changes in interest rates on the company's variable-rate borrowings - As of September 30, 2023, $70.0 million in variable-rate borrowings were outstanding under the secured revolving credit facility. A hypothetical 100 bps increase in the effective interest rate would result in an additional $0.7 million in interest expense over a 12-month period[176] Other Risks This section addresses other potential business risks, such as purchase order commitments with suppliers - The Company enters into purchase order commitments with suppliers, which can generally be canceled, though termination charges may apply[177] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of the Company's disclosure controls and procedures and reports no material changes to internal control over financial reporting during the fiscal quarter Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures as assessed by management - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023[178] Changes in Internal Control over Financial Reporting This section confirms whether any material changes occurred in the company's internal control over financial reporting during the fiscal quarter - There were no changes in the Company's internal control over financial reporting that materially affected, or were likely to materially affect, such control during the fiscal quarter ended September 30, 2023[180] PART II - OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and equity security sales ITEM 1. LEGAL PROCEEDINGS This section states that the Company is not currently involved in any legal proceedings that 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 that it believes would have a material adverse effect on its financial position, results of operations, or cash flows[183] ITEM 1A. RISK FACTORS This section confirms that there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - There have been no material changes to the risk factors described in the Company's Form 10-K for the 2022 fiscal year[184] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section provides details on share repurchases conducted during the third quarter of fiscal 2023, including the number of shares, average price paid, and remaining authorization Share Repurchases This section provides details on the company's share repurchase program, including shares bought back and remaining authorization Share Repurchase Activity (Q3 2023) | Period | Total shares purchased | Average price paid per share | | :-------------------------------- | :--------------------- | :--------------------------- | | July 2, 2023 through July 29, 2023 | 129,485 | $73.36 | | July 30, 2023 through August 26, 2023 | 60,163 | $72.51 | | August 27, 2023 through September 30, 2023 | 202,715 | $68.47 | | Total | 392,363 | | - During Q3 2023, the Company repurchased 390,004 shares as part of publicly announced plans, with an approximate remaining authorization of $682.0 million[185][187] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section indicates that there are no defaults upon senior securities to report ITEM 4. MINE SAFETY DISCLOSURES This section states that there are no mine safety disclosures to report ITEM 5. OTHER INFORMATION This section provides information on securities trading plans adopted by directors and executive officers during the third quarter of fiscal 2023 Securities Trading Plans of Directors and Executive Officers This section details the adoption of Rule 10b5-1 trading plans by directors and executive officers for the sale of common stock and exercise of vested stock options Securities Trading Plans | Name and Title | Action | Adoption Date | Rule 10b5-1 | Number of Securities to be Sold | Expiration Date | | :-------------------------------------- | :----- | :------------ | :---------- | :------------------------------ | :-------------- | | Michael D. Casey, Chairman & CEO | Adoption | 8/2/2023 | x | 89,139 | 11/6/2024 | | Richard F. Westenberger, EVP & CFO | Adoption | 8/4/2023 | x | 3,800 | 2/16/2024 | | Brian J. Lynch, President & COO | Adoption | 8/4/2023 | x | 19,500 | 11/1/2024 | - Several directors and executive officers adopted Rule 10b5-1 trading plans in August 2023 for the potential sale of common stock and exercise of vested stock options[189][190][191] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, certifications, and XBRL-related documents - Exhibits include the Amended and Restated Certificate of Incorporation and By-Laws, Rule 13a-15(e)/15d-15(e) and Section 1350 Certifications, and various XBRL documents[192] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, certifying the accuracy of the report - The report was signed on October 27, 2023, by Michael D. Casey, Chief Executive Officer, and Richard F. Westenberger, Executive Vice President and Chief Financial Officer[197]