Carter’s, Inc. Reports Fourth Quarter and Fiscal Year 2022 Results

• Fourth quarter fiscal 2022 results
  • Net sales $912 million
  • Diluted EPS $2.11, including non-cash charge of $0.18 related to impairment of the Skip Hop tradename; adjusted diluted EPS $2.29
• Fiscal year 2022 results
  • Net sales $3.2 billion
  • Diluted EPS $6.34; adjusted diluted EPS $6.90
• Returned $418 million to shareholders through share repurchases and dividends in fiscal 2022
• Fiscal year 2023 outlook¹:
  • Net sales of $3.0 billion
  • Adjusted operating income of $350 million
  • Adjusted diluted EPS of $6.15
• Board of Directors declares quarterly dividend of $0.75 per share

Carter’s, Inc. (NYSE:CRI), the largest branded marketer of young children’s apparel in North America, today reported its fourth quarter and fiscal 2022 results.

“We saw stronger than expected demand for our brands in the final months of the year which enabled Carter’s to achieve its fourth quarter sales and earnings objectives,” said Michael D. Casey, Chairman and Chief Executive Officer.

“Our supply chain performance improved meaningfully in the second half of 2022, enabling a stronger product offering for holiday shoppers and better on-time deliveries of our new Spring product offerings.

“Despite a very promotional market, we improved price realization in the fourth quarter which, together with lower spending and better inventory results, drove higher than expected cash flow.

“In 2023, we expect inflation will continue to weigh on consumers, especially families with young children. Given the slowdown in consumer demand in 2022, most of our wholesale customers are planning inventory commitments very conservatively in the first half this year, and we plan to do so as well.

“Assuming continued moderation in inflation and improvement in market conditions, we expect that the trend in demand for our brands will improve beginning in the second half this year. Based on a favorable trend in product costs and ocean freight rates, we also expect to see growth in profitability in the second half.

“Carter’s has the broadest distribution of young children’s apparel in North America, selling our brands through nearly 20,000 store locations and on the most successful online platforms, including Amazon, Target, Walmart, Kohl’s and Macy’s.

“No other Company has the scope and depth of relationships that Carter’s has built with the most successful retailers of young children’s apparel. Carter’s is also the largest specialty retailer of children’s apparel with nearly 1,000 stores in North America and multi-brand websites which we believe provide the best value and experience in young children’s apparel. We believe Carter’s is well-positioned to gain share and benefit from the market recovery in the years ahead.”

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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 adjustments provide a meaningful comparison of the Company’s results and afford investors a view of what management considers to be the Company’s core performance. These measures 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.

Consolidated Results

Fourth Quarter of Fiscal 2022 compared to Fourth Quarter of Fiscal 2021

Consolidated net sales decreased $150.0 million, or 14.1%, to $912.1 million, driven by declines in the Company’s U.S. Retail, U.S. Wholesale, and International segments of 12.7%, 17.8%, and 12.0%, respectively. These declines reflect the significant impact inflation has had on demand from consumers and wholesale customers. U.S. Retail comparable net sales declined 12.9%. Changes in foreign currency exchange rates used for translation in the fourth quarter fiscal 2022, as compared to the fourth quarter of fiscal 2021, had an unfavorable effect on consolidated net sales of approximately $5.8 million, or 0.5%.

Operating income decreased $28.4 million, or 20.6%, to $109.5 million, compared to $138.0 million in the fourth quarter of fiscal 2021. Fourth quarter fiscal 2022 results include a non-cash, pre-tax charge of $9.0 million related to the write-down of the Skip Hop tradename asset recorded at the time of the acquisition of the Skip Hop business in February 2017. The reduction in the value of this intangible asset reflects lower projected sales and earnings for Skip Hop. Operating margin decreased 100 basis points to 12.0%, principally reflecting fixed cost deleverage on lower sales, the Skip Hop tradename impairment, and higher ocean freight rates, partially offset by lower performance-based compensation provisions and lower air freight expenses.

Adjusted operating income (a non-GAAP measure) decreased $19.3 million, or 14.0%, to $118.5 million, compared to $137.9 million in the fourth quarter of fiscal 2021. Adjusted operating margin was comparable to the prior year at 13.0%, principally reflecting lower performance-based compensation provisions and lower air freight expense, offset by fixed cost deleverage on lower sales and higher ocean freight rates.

Net income decreased $16.8 million, or 17.3%, to $80.2 million, compared to $97.0 million in the fourth quarter of fiscal 2021. Diluted earnings per share decreased 8.7% to $2.11, compared to $2.31 in the prior year period. Fourth quarter 2022 results include a non-cash, after-tax charge of $6.9 million related to the write-down of the Skip Hop tradename.

Adjusted net income (a non-GAAP measure) decreased $9.9 million, or 10.2%, to $87.0 million, compared to $96.9 million in the fourth quarter of fiscal 2021. Adjusted diluted earnings per share (a non-GAAP measure) decreased 0.9% to $2.29, compared to $2.31 in the fourth quarter of fiscal 2021.

Fiscal Year 2022 compared to Fiscal Year 2021

Consolidated net sales decreased $273.7 million, or 7.9%, to $3.2 billion. U.S. Retail net sales declined 11.5%, reflecting inflationary pressures driving lower consumer demand and the comparison to the prior year period, which benefited from significant and unprecedented government stimulus payments made to consumers in response to the pandemic. U.S. Retail comparable net sales declined 10.1%. U.S. Wholesale and International net sales declined 4.1%, and 1.9%, respectively. Changes in foreign currency exchange rates used for translation in fiscal 2022, as compared to fiscal 2021, had an unfavorable effect on consolidated net sales of approximately $11.2 million, or 0.3%.

Operating income in fiscal 2022 decreased $117.9 million, or 23.7%, to $379.2 million, compared to $497.1 million in fiscal 2021. Fiscal 2022 results include a non-cash, pre-tax charge of $9.0 million related to the write-down of the Skip Hop tradename. Operating margin decreased 250 basis points to 11.8%, principally reflecting higher ocean freight rates, fixed cost deleverage on lower sales, increased inventory provisions, and the Skip Hop tradename impairment, partially offset by lower performance-based compensation provisions, the benefit of closing low-margin stores, and lower air freight expenses.

Adjusted operating income (a non-GAAP measure) decreased $112.6 million, or 22.5% to $388.2 million, compared to $500.8 million in fiscal 2021. Adjusted operating margin decreased 230 basis points to 12.1%, principally reflecting higher ocean freight rates, fixed cost deleverage on lower sales, and increased inventory provisions, partially offset by lower performance-based compensation provisions, the benefit of closing low-margin stores, and lower air freight expenses.

Net income in fiscal 2022 decreased $89.7 million, or 26.4%, to $250.0 million, compared to $339.7 million in fiscal 2021. Diluted earnings per share decreased 18.8% to $6.34, compared to $7.81 in fiscal 2021. Fiscal 2022 results include a non-cash, after-tax charge of $6.9 million related to the write-down of the Skip Hop tradename.

Adjusted net income (a non-GAAP measure) decreased $70.4 million, or 20.6%, to $272.0 million compared to $342.5 million in fiscal 2021. Adjusted earnings per diluted share (a non-GAAP measure) decreased 12.3% to $6.90, compared to $7.87 in fiscal 2021.

Net cash provided by operations in fiscal 2022 was $88.4 million compared to $268.3 million in fiscal 2021. The decline primarily reflected lower earnings, growth in inventory, and the timing of vendor payments.

See the “Business Segment Results” and “Reconciliation of Adjusted Results to GAAP” sections of this release for additional disclosures regarding business segment performance and non-GAAP measures.

Return of Capital

In the fourth quarter and fiscal 2022, the Company returned to shareholders a total of $86.5 million and $417.8 million, respectively, through share repurchases and cash dividends as described below.

• Share repurchases: During the fourth quarter of fiscal 2022, the Company repurchased and retired 0.8 million shares of its common stock for $57.9 million at an average price of $71.97 per share. During fiscal 2022, the Company repurchased and retired 3.7 million shares for $299.7 million at an average price of $79.97 per share. These share repurchases in fiscal 2022 represented approximately 9.1% of common shares outstanding as of the beginning of fiscal year 2022. All shares were repurchased in open market transactions pursuant to applicable regulations for such transactions. As of December 31, 2022, the total remaining capacity under the Company’s previously announced repurchase authorizations was approximately $749.5 million.

• Dividends: During the fourth quarter of fiscal 2022, the Company paid a cash dividend of $0.75 per common share totaling $28.6 million. In fiscal 2022, the Company paid quarterly cash dividends of $0.75 per common share each quarter totaling $118.1 million.

On February 23, 2023, the Company’s Board of Directors approved a quarterly cash dividend of $0.75 per share, for payment on March 17, 2023, to shareholders of record at the close of business on March 7, 2023.

From the beginning of fiscal 2007 through fiscal 2022, the Company has returned a total of $2.9 billion to shareholders through share repurchases and dividends.

The Company’s Board of Directors will evaluate future distributions of capital, including dividends and share repurchases, based on a number of factors, including business conditions, the Company’s financial performance, and other considerations.

Business Outlook

We do not reconcile forward-looking adjusted operating income or adjusted diluted earnings per share 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 above, 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 or diluted EPS, the most directly comparable GAAP metrics to adjusted operating income and adjusted diluted earnings per share, respectively.

For fiscal year 2023, the Company expects approximately:

• $3.0 billion in net sales
• $350 million in adjusted operating income (compared to $388.2 million in fiscal 2022);
• $6.15 in adjusted diluted earnings per share (compared to $6.90 in fiscal 2022);
• Operating cash flow of over $300 million; and
• Capital expenditures of approximately $75 million.

Our forecast for fiscal year 2023 assumes:

• Continued inflationary pressure on consumer demand and cautious inventory commitments by wholesale customers;
• Stronger second half performance as trends in sales, inbound freight, and product costs moderate;
• Gross margin expansion, driven by improved price realization and lower costs;
• Comparable SG&A;
• Higher interest expense and effective tax rate; and
• Continued return of capital initiatives.

For the first quarter of fiscal 2023, the Company expects approximately:

• $630 million to $650 million in net sales;
• $30 million to $40 million in adjusted operating income (compared to $102.6 million in the first quarter of fiscal 2022); and
• $0.35 to $0.55 in adjusted diluted earnings per share (compared to $1.66 in the first quarter of fiscal 2022).

Our forecast for the first quarter of fiscal 2023 assumes:

• Continued inflationary pressure on consumer demand and cautious inventory commitments by wholesale customers;
• Improved gross margin, reflecting better price realization and channel mix;
• SG&A rate deleverage on lower sales;
• Lower interest expense;
• Comparable effective tax rate; and
• Lower average number of shares outstanding.

Our forecasts for fiscal year 2023 and the first quarter of fiscal 2023 exclude anticipated charges of approximately $5 million to $7 million related to organizational restructurings and office space consolidation.

Conference Call

The Company will hold a conference call with investors to discuss fourth quarter and fiscal 2022 results and its business outlook on February 24, 2023 at 8:30 a.m. Eastern Standard 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 “Webcasts & Presentations.” To access the call by phone, please preregister on https://register.vevent.com/register/BId2837bea99604ffea4de55f21e4b4cae to receive your dial-in number and unique passcode.

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

About Carter’s, Inc.

Carter’s, Inc. is the largest branded marketer of young children’s apparel in North America. The Company owns the Carter’s and OshKosh B’gosh brands, two of the most recognized brands in the marketplace. These brands are sold in leading department stores, national chains, and specialty retailers domestically and internationally. They are also sold through nearly 1,000 Company-operated stores in the United States, Canada, and Mexico and online at www.carters.com, www.oshkosh.com, www.cartersoshkosh.ca, and www.carters.com.mx. The Company’s Child of Mine brand is available at Walmart, its Just One You brand is available at Target, and its Simple Joys brand is available on Amazon. The Company also owns Little Planet, a brand focused on organic fabrics and sustainable materials, and Skip Hop, a global lifestyle brand for families with young children. Carter’s is headquartered in Atlanta, Georgia. Additional information may be found at www.carters.com.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws relating to our future results and performance, including statements with respect to the potential effects of macroeconomic conditions, the COVID-19 pandemic, inflationary pressures, the impact of supply chain delays, and the Company’s future outlook, financial results, liquidity, strategy, financings, and investments. Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or not materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. Certain of the risks and uncertainties that could cause actual results and performance to differ materially are described in the Company’s most recently filed Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission from time to time under the headings “Risk Factors.” Included among those risks are those related to: the effects of the COVID-19 pandemic and macroeconomic factors, including inflationary pressures; financial difficulties for one or more of our major customers; an overall decrease in consumer spending; our products not being accepted in the marketplace; increased competition in the market place; diminished value of our brands; the failure to protect our intellectual property; the failure to comply with applicable quality standards or regulations; unseasonable or extreme weather conditions; pending and threatened lawsuits; a breach of our information technology systems and the loss of personal data; increased margin pressures, including increased cost of materials and labor; our foreign sourcing arrangements; disruptions in our supply chain, including increased transportation and freight costs; the management and expansion of our business domestically and internationally; the acquisition and integration of other brands and businesses; and changes in our tax obligations, including additional customs, duties or tariffs. The Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

EBITDA and Adjusted EBITDA are supplemental financial measures that are not defined or prepared in accordance with GAAP. We define EBITDA as net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items described in the footnotes (a) - (e) to the table above.

We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. These measures are used by the Company's executive management to assess the Company's performance.

The use of EBITDA and Adjusted EBITDA instead of net income or cash flows from operations has limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. EBITDA and Adjusted EBITDA do not represent net income or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. While EBITDA, Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. EBITDA and Adjusted EBITDA do not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us for working capital, debt service and other purposes.

The Company evaluates its net sales on both an “as reported” and a “constant currency” basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates that occurred between the comparative periods. Constant currency net sales results are calculated by translating current period net sales in local currency to the U.S. dollar amount by using the currency conversion rate for the prior comparative period. The Company consistently applies this approach to net sales for all countries where the functional currency is not the U.S. dollar. The Company believes that the presentation of net sales on a constant currency basis provides useful supplemental information regarding changes in our net sales that were not due to fluctuations in currency exchange rates and such information is consistent with how the Company assesses changes in its net sales between comparative periods.

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