Market Overview

Carter's, Inc. Reports Second Quarter Fiscal 2018 Results

Share:
  • Net sales $696 million, growth of 1%
  • Diluted EPS $0.79, growth of 2%; adjusted diluted EPS comparable to
    second quarter 2017
  • Returned $131 million to shareholders through share repurchases and
    dividends in the first half of fiscal 2018.
  • Company reaffirms full year fiscal 2018 outlook: net sales growth
    of 3%; adjusted diluted EPS growth of 12%

Carter's, Inc. (NYSE:CRI), the largest branded marketer in North America
of apparel exclusively for babies and young children, today reported its
second quarter fiscal 2018 results.

"We exceeded our sales and earnings forecasts in the second quarter,"
said Michael D. Casey, Chairman and Chief Executive Officer. "Our growth
was driven by our U.S. retail and international businesses. We saw a
meaningful improvement in consumer demand for our brands beginning in
late April as spring-like weather arrived in more parts of the United
States. Earlier than expected wholesale demand, improved price
realization and curtailed spending also contributed to better than
planned performance.

"Carter's has the broadest distribution of young children's apparel in
the United States. With the Toys "R" Us store closure process now
completed, we believe we are well-positioned to recapture a good portion
of our lost sales to this historically good customer, and will further
strengthen our leading market share position.

"Given the strength of our product offerings and growth strategies,
together with the benefit from the new federal tax law, we are
reaffirming our sales and earnings growth objectives for 2018."

Consolidated Results

Second Quarter of Fiscal 2018 compared to Second Quarter of Fiscal
2017

Net sales increased $4.4 million, or 0.6%, to $696.2 million,
principally driven by growth in the Company's U.S. Retail and
International segments, including the contribution from the 2017 Mexico
licensee acquisition. This growth was partially offset by a net sales
decline in the U.S. Wholesale segment, reflecting discontinued shipments
to Toys "R" Us and Bon-Ton1. Changes in foreign currency
exchange rates in the second quarter of fiscal 2018 compared to the
second quarter of fiscal 2017 favorably affected consolidated net sales
in the second quarter of fiscal 2018 by $2.6 million, or 0.4%. On a
constant currency basis (a non-GAAP measure), consolidated net sales
increased 0.3% in the second quarter of fiscal 2018.

Operating income in the second quarter of fiscal 2018 decreased $7.3
million, or 11.4%, to $57.0 million, compared to $64.3 million in the
second quarter of fiscal 2017. Operating margin decreased 110 basis
points to 8.2%, compared to 9.3% in the second quarter of fiscal 2017.

Adjusted operating income (a non-GAAP measure) decreased $8.6 million,
or 13.1%, to $57.0 million, compared to $65.6 million in the second
quarter of fiscal 2017. Adjusted operating margin (a non-GAAP measure)
decreased 130 basis points to 8.2%, compared to 9.5% in the second
quarter of fiscal 2017, which principally reflects increased investments
in retail and marketing and lower margins in the U.S. Wholesale segment
due to customer mix, partially offset by sourcing efficiencies.

Net income in the second quarter of fiscal 2018 decreased $0.5 million,
or 1.4%, to $37.3 million, or $0.79 per diluted share, compared to $37.8
million, or $0.77 per diluted share, in the second quarter of fiscal
2017. Net income in the second quarter of fiscal 2018 reflects a
consolidated effective income tax rate of 22.8% compared to 34.5% in the
second quarter of fiscal 2017.

Adjusted net income (a non-GAAP measure) decreased $1.3 million, or
3.4%, to $37.3 million, compared to $38.6 million in the second quarter
of fiscal 2017. Adjusted earnings per diluted share (a non-GAAP measure)
in the second quarter of fiscal 2018 was $0.79, which was comparable to
the second quarter of fiscal 2017.

1 Retailers which have declared bankruptcy

First Half of Fiscal 2018 compared to First Half of Fiscal 2017

Net sales increased $27.4 million, or 1.9%, to $1.5 billion, principally
driven by growth in the Company's U.S. Retail and International
segments, including contributions from the 2017 Mexico licensee and Skip
Hop
acquisitions, partially offset by a net sales decline in the
U.S. Wholesale segment. Changes in foreign currency exchange rates in
the first half of fiscal 2018 compared to the first half of fiscal 2017
favorably affected consolidated net sales in the first half of fiscal
2018 by $5.4 million, or 0.4%. On a constant currency basis (a non-GAAP
measure), consolidated net sales increased 1.5% in the first half of
fiscal 2018.

Operating income in the first half of fiscal 2018 decreased $25.5
million, or 17.9%, to $117.3 million, compared to $142.8 million in the
first half of fiscal 2017. 2018 first half results include $12.8 million
in charges related to the bankruptcy of a wholesale customer, Toys "R"
Us, which were recorded in the first quarter. Operating margin decreased
190 basis points to 8.1%, compared to 10.0% in the first half of fiscal
2017.

Adjusted operating income (a non-GAAP measure which excludes the $12.8
million charge noted above and other unusual items in the first half of
fiscal 2018 and 2017) decreased $16.2 million, or 11.1%, to $129.7
million, compared to $145.9 million in the first half of fiscal 2017.
Adjusted operating margin (a non-GAAP measure) decreased 130 basis
points to 8.9%, compared to 10.2% in the first half of fiscal 2017,
which reflects increased investments in retail and marketing and lower
margins in the U.S. Wholesale segment due to customer mix, partially
offset by sourcing efficiencies.

Net income in the first half of fiscal 2018 decreased $4.7 million, or
5.5%, to $79.7 million, or $1.68 per diluted share, compared to $84.4
million, or $1.72 per diluted share, in the first half of fiscal 2017.
Net income in the first half of fiscal 2018 reflects a consolidated
effective income tax rate of 21.2% compared to 34.8% in the first half
of fiscal 2017.

Adjusted net income (a non-GAAP measure) increased $2.9 million, or
3.3%, to $89.2 million, compared to $86.4 million in the first half of
fiscal 2017. Adjusted earnings per diluted share (a non-GAAP measure) in
the first half of fiscal 2018 increased 6.6% to $1.88, compared to $1.76
in the first half of fiscal 2017.

Cash flow from operations in the first half of fiscal 2018 was $103.1
million compared to $107.3 million in the first half of fiscal 2017. The
decrease reflects lower net income and an increase in working capital.

See the "Reconciliation of GAAP to Adjusted Results" section of this
release for additional disclosures and reconciliations regarding
non-GAAP measures. Note that there were no adjustments to GAAP results
in the second quarter of fiscal 2018.

Business Segment Results

U.S. Retail Segment

Second Quarter of Fiscal 2018 compared to Second Quarter of Fiscal
2017

U.S. Retail segment sales increased $10.6 million, or 2.7%, to $402.0
million. U.S. Retail comparable sales increased 0.9%, driven by growth
in eCommerce sales.

In the second quarter of fiscal 2018, the Company opened 14 stores and
closed six stores in the United States.

First Half of Fiscal 2018 compared to First Half of Fiscal 2017

U.S. Retail segment sales increased $30.5 million, or 4.0%, to $785.8
million. U.S. Retail comparable sales increased 1.9%, driven by growth
in eCommerce sales.

In the first half of fiscal 2018, the Company opened 23 stores and
closed 27 stores in the United States. As of the end of the second
quarter of fiscal 2018, the Company operated 826 retail stores in the
United States.

U.S. Wholesale Segment

Second Quarter of Fiscal 2018 compared to Second Quarter of Fiscal
2017

U.S. Wholesale segment net sales decreased $8.2 million, or 3.8%, to
$209.5 million, reflecting lower shipments principally due to
discontinued sales to Toys "R" Us and Bon-Ton.

First Half of Fiscal 2018 compared to First Half of Fiscal 2017

U.S. Wholesale segment net sales decreased $20.0 million, or 3.9%, to
$490.3 million, reflecting lower shipments principally due to
discontinued sales to Toys "R" Us and Bon-Ton, partially offset by
contributions from the 2017 Skip Hop acquisition.

International Segment

Second Quarter of Fiscal 2018 compared to Second Quarter of Fiscal
2017

International segment net sales increased $2.1 million, or 2.6%, to
$84.7 million, reflecting growth in Canada and contribution from the
2017 Mexico acquisition, offset by decreased demand in various markets
outside of the U.S.

Changes in foreign currency exchange rates in the second quarter of
fiscal 2018 compared to the second quarter of fiscal 2017 favorably
affected International segment net sales in the second quarter of fiscal
2018 by $2.6 million, or 3.1%. On a constant currency basis (a non-GAAP
measure), International segment net sales declined 0.6%.

First Half of Fiscal 2018 compared to First Half of Fiscal 2017

International segment net sales increased $16.9 million, or 10.6%, to
$175.9 million, driven by contributions from the 2017 Mexico and Skip
Hop
acquisitions and growth in Canada, partially offset by decreased
demand in various markets outside of the U.S.

Changes in foreign currency exchange rates in the first half of fiscal
2018 compared to the first half of fiscal 2017 favorably affected
International segment net sales in the first half of fiscal 2018 by $5.4
million, or 3.4%. On a constant currency basis (a non-GAAP measure),
International segment net sales increased 7.3%.

As of the end of the second quarter of fiscal 2018, the Company operated
181 retail stores in Canada and 42 retail stores in Mexico.

Return of Capital

In the second quarter and first half of fiscal 2018, the Company
returned to shareholders a total of $84.9 million and $131.4 million,
respectively, through share repurchases and cash dividends as described
below.

During the second quarter of fiscal 2018, the Company repurchased and
retired 599,314 shares of its common stock for $63.9 million at an
average price of $106.62 per share. In the first half of fiscal 2018,
the Company repurchased and retired 820,627 shares of its common stock
for $89.1 million at an average price of $108.57 per share. Fiscal
year-to-date through July 25, 2018, the Company has repurchased and
retired a total of 934,105 shares for $101.8 million at an average price
of $109.02 per share. All shares were repurchased in open market
transactions pursuant to applicable regulations for such transactions.
As of July 25, 2018, the total remaining capacity under the Company's
previously announced repurchase authorizations was approximately $483.8
million.

In the second quarter of fiscal 2018, the Company paid a cash dividend
of $0.45 per share totaling $21.0 million. In the first half of fiscal
2018, the company paid cash dividends of $0.45 per share each quarter
totaling $42.3 million. Future declarations of quarterly dividends and
the establishment of related record and payment dates will be at the
discretion of the Company's Board of Directors based on a number of
factors, including the Company's future financial performance and other
considerations.

2018 Business Outlook

For the third quarter of fiscal 2018, the Company projects net sales to
be comparable to the third quarter of fiscal 2017 and adjusted diluted
earnings per share to be comparable to adjusted diluted earnings per
share of $1.70 in the third quarter of fiscal 2017. Net sales and
adjusted earnings in the third quarter of fiscal 2018 assume a partial
recovery of lost sales initially planned to Toys "R" Us and Bon-Ton.

For fiscal 2018, the Company projects net sales to increase
approximately 3% compared to fiscal 2017 and adjusted diluted earnings
per share to increase approximately 12% compared to adjusted diluted
earnings per share of $5.77 in fiscal 2017. Forecasted net sales and
adjusted earnings for fiscal 2018 assume: 1) the Company recaptures
approximately half of the lost sales initially planned to Toys "R" Us
and Bon-Ton over the last three fiscal quarters of 2018; 2) a reduction
in discretionary spending from originally planned levels; and 3) an
estimated effective tax rate of approximately 22%. This adjusted
earnings forecast excludes the unusual charge of approximately $12.8
million related to the Toys "R" Us bankruptcy and a benefit of
approximately $0.4 million related to an insurance recovery associated
with unusual storm-related store closures, both of which were recorded
in the first quarter of fiscal 2018.

The Company believes these non-GAAP measurements provide investors with
a meaningful view of the Company's core operating results, and are the
same measurements used by the Company's executive management to assess
the Company's performance.

Adoption of New Accounting Standard

Beginning in fiscal 2018, the Company adopted the Financial Accounting
Standards Board's Accounting Standards Codification No. 606, Revenue
from Contracts with Customers
, and related amendments ("ASC 606")
using the full retrospective adoption method. All periods in fiscal 2017
and fiscal 2016 were amended to reflect these provisions, and
retained earnings at January 2, 2016 (beginning of fiscal 2016) were
adjusted for the cumulative effect of periods prior to fiscal 2016. The
adoption of ASC 606 had no material effect on the Company's
consolidated financial position, results of operations, or cash flows.

Conference Call

The Company will hold a conference call with investors to discuss second
quarter fiscal 2018 results and its business outlook on July 26, 2018 at
8:30 a.m. Eastern Daylight Time. To participate in the call, please dial
334-323-0522. To listen to a live broadcast via the internet, please
visit www.carters.com
and select the "Q2 2018 Earnings Conference Call" link under the
"Investor Relations" tab. Presentation materials for the call can be
accessed under the same tab by selecting the link for "News & Events"
followed by "Webcasts & Presentations". A replay of the call will be
available shortly after the broadcast through August 4, 2018, at
888-203-1112 (U.S. / Canada) or 719-457-0820 (international), passcode
1449636. The replay will also be archived on the Company's website under
the "Investor Relations" tab.

About Carter's, Inc.

Carter's, Inc. is the largest branded marketer in North America of
apparel exclusively for babies and young children. 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 more than 1,000
Company-operated stores in the United States, Canada, and Mexico and
online at www.carters.com,
www.oshkosh.com,
and www.cartersoshkosh.ca.
The Company's Just One You and Genuine Kids brands are
available at Target, its Child of Mine brand is available at
Walmart, and its Simple Joys brand is available on Amazon. The
Company also owns 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.

Cautionary Language

This press release contains forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 relating to the Company's future
performance, including, without limitation, statements with respect to
the Company's anticipated financial results for the third quarter of
fiscal 2018 and fiscal year 2018, or any other future period,
assessments of the Company's performance and financial position, and
drivers of the Company's sales and earnings growth. 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 the risks and uncertainties that may impact future
results are the risks of: losing one or more major customers, vendors,
or licensees due to competition, inadequate quality of the Company's
products, or otherwise; financial difficulties for one or more of the
Company's major customers, vendors, or licensees, or an overall decrease
in consumer spending; our products not being accepted in the marketplace
due to quality concerns, changes in consumer preference and fashion
trends, or otherwise; a failure to meet regulatory requirements,
including those relating to product quality and safety; negative
publicity, including as a result of product recalls or otherwise; a
failure to protect the Company's intellectual property; various types of
litigation, including class action litigation brought under various
consumer protection, employment, and privacy and information security
laws; a breach of the Company's consumer databases, systems, or
processes; slow-downs, disruptions, or strikes in the Company's supply
chain, including disruptions resulting from foreign supply sources, the
Company's distribution centers, or in-sourcing capabilities;
unsuccessful expansion into international markets or failure to
successfully manage legal, regulatory, political and economic risks of
the Company's existing international operations, including maintaining
compliance with worldwide anti-bribery laws; failure to successfully
integrate acquired businesses; fluctuations in foreign currency exchange
rates; the imposition of new regulations relating to imports, duties, or
taxes; and an inability to obtain additional financing on favorable
terms. 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.

   
CARTER'S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)

 
Fiscal Quarter Ended Two Fiscal Quarters Ended
June 30, 2018   July 1, 2017 June 30, 2018   July 1, 2017
Net sales $ 696,197 $ 691,751 $ 1,451,983 $ 1,424,578
Cost of goods sold 386,239   388,504   809,548   805,639  
Gross profit 309,958 303,247 642,435 618,939
Royalty income, net 10,355 11,210 18,349 21,768
Selling, general, and administrative expenses 263,343   250,146   543,505   497,940  
Operating income 56,970 64,311 117,279 142,767
Interest expense 7,937 7,194 15,922 14,298
Interest income (225 ) (79 ) (391 ) (219 )
Other (income) expense, net 975   (544 ) 593   (765 )
Income before income taxes 48,283 57,740 101,155 129,453
Provision for income taxes 11,015   19,947   21,418   45,065  
Net income $ 37,268   $ 37,793   $ 79,737   $ 84,388  
 
Basic net income per common share $ 0.80 $ 0.78 $ 1.70 $ 1.74
Diluted net income per common share $ 0.79 $ 0.77 $ 1.68 $ 1.72
Dividend declared and paid per common share $ 0.45 $ 0.37 $ 0.90 $ 0.74
 
     
CARTER'S, INC.

BUSINESS SEGMENT RESULTS

(dollars in thousands)

(unaudited)

 
Fiscal Quarter Ended Two Fiscal Quarters Ended
  % of     % of   % of     % of
June 30, Total Net July 1, Total Net June 30, Total Net July 1, Total Net
2018 Sales 2017 Sales 2018 Sales 2017 Sales

Net sales:

U.S. Retail (a) $ 402,021 57.7 % $ 391,457 56.6 % $ 785,762 54.1 % $ 755,299 53.0 %
U.S. Wholesale 209,476 30.1 % 217,710 31.5 % 490,309 33.8 % 510,265 35.8 %
International (b) 84,700   12.2 % 82,584   11.9 % 175,912   12.1 % 159,014   11.2 %
Total net sales $ 696,197   100.0 % $ 691,751   100.0 % $ 1,451,983   100.0 % $ 1,424,578   100.0 %
 
% of % of % of % of

 

Segment Segment Segment Segment

Operating income (loss):

Net Sales Net Sales Net Sales Net Sales
U.S. Retail (c) (i) $ 45,428 11.3 % $ 42,133 10.8 % $ 74,947 9.5 % $ 71,922 9.5 %
U.S. Wholesale (d) (i) 30,338 14.5 % 35,805 16.4 % 80,610 16.4 % 105,501 20.7 %
International (e) (i) 4,312 5.1 % 7,597 9.2 % 8,073 4.6 % 11,282 7.1 %
Corporate expenses (f) (g) (h) (23,108 ) (21,224 ) (46,351 ) (45,938 )
Total operating income $ 56,970   8.2 % $ 64,311   9.3 % $ 117,279   8.1 % $ 142,767   10.0 %
 
(a)   Includes retail store and eCommerce results.
(b) Includes international retail, eCommerce, and wholesale sales.
(c) Two fiscal quarters ended June 30, 2018 includes insurance recovery
of approximately $0.4 million associated with unusual storm-related
store closures in 2017.
(d) Two fiscal quarters ended June 30, 2018 includes $12.8 million of
charges related to a customer bankruptcy recorded in the first
quarter of fiscal 2018.
(e) Includes international licensing income.
(f) Corporate expenses include expenses related to incentive
compensation, stock-based compensation, executive management,
severance and relocation, finance, office occupancy, information
technology, legal, consulting, and audit fees.
(g) Includes acquisition-related costs of approximately $0.8 million and
$2.5 million for the fiscal quarter and two fiscal quarters ended
July 1, 2017, respectively, of which approximately $0.3 million and
$0.6 million, respectively, were not originally reported as
acquisition-related costs.
(h) Includes charges related to the Company's direct sourcing initiative
of approximately $0.1 million and $0.3 million for the fiscal
quarter and two fiscal quarters ended July 1, 2017, respectively.
(i) A total of $0.4 million of certain costs related to inventory
acquired from Skip Hop is included in operating income between U.S.
Wholesale, U.S. Retail, and International for the fiscal quarter and
two fiscal quarters ended July 1, 2017.
 
     
CARTER'S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)

 
June 30, 2018 December 30, 2017 July 1, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 183,202 $ 178,494 $ 173,564
Accounts receivable, net 152,517 240,561 165,183
Finished goods inventories 663,263 548,722 610,423
Prepaid expenses and other current assets 51,955   52,935   46,402  
Total current assets 1,050,937 1,020,712 995,572
Property, plant, and equipment, net of accumulated depreciation of
$430,834, $404,173, and $384,881, respectively
364,223 377,924 382,472
Tradenames, net 365,817 365,551 365,639
Goodwill 228,555 230,424 231,709
Customer relationships, net 46,222 47,996 35,096
Other assets 27,775   28,435   23,246  
Total assets $ 2,083,529   $ 2,071,042   $ 2,033,734  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 216,931 $ 182,114 $ 217,340
Other current liabilities 95,685   149,134   96,460  
Total current liabilities 312,616 331,248 313,800
 
Long-term debt, net 682,778 617,306 661,846
Deferred income taxes 85,755 84,944 133,273
Other long-term liabilities 192,051   180,128   174,867  
Total liabilities 1,273,200 1,213,626 1,283,786
 
Commitments and contingencies
 
Stockholders' equity:
Preferred stock; par value $.01 per share; 100,000 shares
authorized; none issued or outstanding at June 30, 2018, December
30, 2017, and July 1, 2017
Common stock, voting; par value $.01 per share; 150,000,000 shares
authorized; 46,565,443, 47,178,346 and 47,971,577 shares issued and
outstanding at June 30, 2018, December 30, 2017 and July 1, 2017,
respectively
466 472 480
Accumulated other comprehensive loss (35,532 ) (29,093 ) (30,653 )
Retained earnings 845,395   886,037   780,121  
Total stockholders' equity 810,329   857,416   749,948  
Total liabilities and stockholders' equity $ 2,083,529   $ 2,071,042   $ 2,033,734  
 
 
CARTER'S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 
Two Fiscal Quarters Ended
June 30, 2018   July 1, 2017
Cash flows from operating activities:
Net income $ 79,737 $ 84,388
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property, plant, and equipment 41,989 39,705
Amortization of intangible assets 1,845 892
Amortization of debt issuance costs 865 749
Stock-based compensation expense 10,266 9,646
Unrealized foreign currency exchange loss (gain), net 202 (555 )
Provisions for doubtful accounts receivable from customers 11,511 605
Loss on disposal of property, plant, and equipment, net of recoveries 478 221
Deferred income taxes 1,400 3,109
Effect of changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable 76,364 56,610
Finished goods inventories (117,469 ) (91,446 )
Prepaid expenses and other assets 129 (13,151 )
Accounts payable and other liabilities (4,254 ) 16,560  

Net cash provided by operating activities

103,063   107,333  
 
Cash flows from investing activities:
Capital expenditures (31,750 ) (34,276 )
Acquisitions of businesses, net of cash acquired 96 (143,704 )
Disposals and recoveries from property, plant, and equipment 373    
Net cash used in investing activities (31,281 ) (177,980 )
 
Cash flows from financing activities:
Borrowings under secured revolving credit facility 150,000 100,000
Payments on secured revolving credit facility (85,000 ) (18,965 )
Repurchases of common stock (89,093 ) (98,236 )
Dividends paid (42,267 ) (35,831 )
Withholdings from vestings of restricted stock (6,667 ) (5,590 )
Proceeds from exercises of stock options 7,376   3,122  
Net cash used in financing activities (65,651 ) (55,500 )
 
Effect of exchange rate changes on cash and cash equivalents (1,423 ) 353  
Net increase (decrease) in cash and cash equivalents 4,708 (125,794 )
Cash and cash equivalents, beginning of period 178,494   299,358  
Cash and cash equivalents, end of period $ 183,202   $ 173,564  
 
 
CARTER'S, INC.
RECONCILIATION OF GAAP TO ADJUSTED RESULTS

(dollars in millions, except earnings per share)

(unaudited)

 
Two Fiscal Quarters Ended June 30, 2018
Gross   % Net     % Net   Operating   % Net   Net   Diluted
Margin Sales SG&A Sales Income Sales Income EPS
As reported (GAAP) (a) $ 642.4 44.2 % $ 543.5 37.4 % $ 117.3 8.1 % $ 79.7 $ 1.68
Customer bankruptcy charges (c) (g) (12.8 ) 12.8 9.8 0.21
Store restructuring costs (d) (g)   0.4   (0.4 ) (0.3 ) (0.01 )
As adjusted (b) $ 642.4   44.2 % $ 531.1   36.6 % $ 129.7   8.9 % $ 89.2   $ 1.88  
 
Fiscal Quarter Ended July 1, 2017
Gross % Net % Net Operating % Net Net Diluted
Margin Sales SG&A Sales Income Sales Income EPS
As reported (GAAP) (a) $ 303.2 43.8 % $ 250.1 36.2 % $ 64.3 9.3 % $ 37.8 $ 0.77
Acquisition costs (e) (g) 0.4 (0.8 ) 1.2 0.8 0.02
Direct sourcing initiative (f) (g)   (0.1 ) 0.1      
As adjusted (b) $ 303.6   43.9 % $ 249.3   36.0 % $ 65.6   9.5 % $ 38.6   $ 0.79  
 
Two Fiscal Quarters Ended July 1, 2017
Gross % Net % Net Operating % Net Net Diluted
Margin Sales SG&A Sales Income Sales Income EPS
As reported (GAAP) (a) $ 618.9 43.4 % $ 497.9 35.0 % $ 142.8 10.0 % $ 84.4 $ 1.72
Acquisition costs (e) (g) 0.4 (2.5 ) 2.9 1.9 0.04
Direct sourcing initiative (f) (g)   (0.3 ) 0.3   0.2    
As adjusted (b) $ 619.3   43.5 % $ 495.2   34.8 % $ 145.9   10.2 % $ 86.4   $ 1.76  
 
(a)   Beginning in fiscal 2018, the Company adopted the Financial
Accounting Standards Board's Accounting Standards Codification No.
606, Revenue from Contracts with Customers, and related amendments
("ASC 606") using the full retrospective adoption method. All
periods in fiscal 2017 and fiscal 2016 were amended to reflect these
provisions, and retained earnings at January 2, 2016 (beginning of
fiscal 2016) were adjusted for the cumulative effect of periods
prior to fiscal 2016. The adoption of ASC 606 had no material effect
on the Company's consolidated financial position, results of
operations, and cash flows.
(b) In addition to the results provided in this earnings release in
accordance with GAAP, the Company has provided adjusted, non-GAAP
financial measurements that present gross margin, SG&A, operating
income, net income, and net income on a diluted share basis
excluding the adjustments discussed above. 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. The adjusted, non-GAAP financial
measurements included in this earnings release should not be
considered as an alternative to net income or as any other
measurement of performance derived in accordance with GAAP. The
adjusted, non-GAAP financial measurements are presented for
informational purposes only and are not necessarily indicative of
the Company's future condition or results of operations.
(c) Related to the Toys "R" Us bankruptcy.
(d) Insurance recovery associated with unusual storm-related store
closures.
(e) Non-recurring costs related to the Skip Hop and Mexico acquisitions.
SG&A and operating income include approximately $0.3 and $0.6
million of costs incurred during the first quarter and first half of
fiscal 2017, respectively, that were not originally reported as
acquisition-related costs.
(f) Costs associated with the Company's direct sourcing initiative,
which include severance and relocation.
(g) The difference between the impacts on operating income and net
income represents the income taxes related to the adjustment item
(calculated using the applicable tax rate of the underlying
jurisdiction).
 

Note: No adjustments were made to GAAP results in the second
quarter of fiscal 2018. Results may not be additive due to
rounding.

 
 
CARTER'S, INC.
RECONCILIATION OF GAAP TO ADJUSTED RESULTS

(dollars in millions, except earnings per share)

(unaudited)

 
Fiscal Quarter Ended September 30, 2017
Gross     Operating    
Margin SG&A Income Net Income Diluted EPS
As reported (GAAP) (a) $ 403.6 $ 283.5 $ 130.4 $ 82.3 $ 1.71
Store restructuring costs (c) (h) (2.7 ) 2.7 2.0 0.04
Acquisition costs (d) (h) 0.4 (0.8 ) 1.2 1.2 0.02
Direct sourcing initiative (e) (h) (0.1 ) 0.1 0.1
Acquisition contingency fair value adjustment (h)   3.6   (3.6 ) (3.6 ) (0.07 )
As adjusted (b) $ 404.0   $ 283.4   $ 130.9   $ 82.0   $ 1.70  
 
Fiscal Year Ended December 30, 2017
Gross Operating
Margin SG&A Income Net Income Diluted EPS
As reported (GAAP) (a) $ 1,483.4 $ 1,106.9 $ 419.6 $ 302.8 $ 6.24
Special employee compensation provision (f) (h) (21.2 ) 21.2 15.1 0.31
Store restructuring costs (c) (h) (2.7 ) 2.7 1.5 0.03
Acquisition costs (d) (h) 1.2 0.2 1.0 0.2
Direct sourcing initiative (e) (h) (0.3 ) 0.3 0.2
Tax reform (g) (h)       (40.0 ) (0.83 )
As adjusted (b) $ 1,484.6   $ 1,082.9   $ 444.8   $ 279.8   $ 5.77  
 
(a)   Beginning in fiscal 2018, the Company adopted the Financial
Accounting Standards Board's Accounting Standards Codification No.
606, Revenue from Contracts with Customers, and related amendments
("ASC 606") using the full retrospective adoption method. All
periods in fiscal 2017 and fiscal 2016 were amended to reflect these
provisions, and retained earnings at January 2, 2016 (beginning of
fiscal 2016) were adjusted for the cumulative effect of periods
prior to fiscal 2016. The adoption of ASC 606 had no material effect
on the Company's consolidated financial position, results of
operations, and cash flows.
(b) In addition to the results provided in this earnings release in
accordance with GAAP, the Company has provided adjusted, non-GAAP
financial measurements that present SG&A, operating income, net
income, and net income on a diluted share basis excluding the
adjustments discussed above. 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. The adjusted, non-GAAP financial measurements
included in this earnings release should not be considered as an
alternative to net income or as any other measurement of performance
derived in accordance with GAAP. The adjusted, non-GAAP financial
measurements are presented for informational purposes only and are
not necessarily indicative of the Company's future condition or
results of operations.
(c) Net costs arising from unusual storm damage and related store
closures.
(d) Non-recurring costs related to the Skip Hop and Mexico acquisitions.
(e) Costs associated with the Company's direct sourcing initiative,
which include severance and relocation.
(f) Special employee compensation provided as a result of the
significant benefit related to the enactment of the Tax Cuts and
Jobs Act of 2017.
(g) Reflects the $40 million net benefit of the Tax Cuts and Jobs Act of
2017.
(h) The difference between the impacts on operating income and net
income represents the income taxes related to the adjustment item
(calculated using the applicable tax rate of the underlying
jurisdiction).
 

Note: Results may not be additive due to rounding.

 
   
CARTER'S, INC.
RECONCILIATION OF NET INCOME ALLOCABLE TO COMMON SHAREHOLDERS

(unaudited)

 
Fiscal Quarter Ended Two Fiscal Quarters Ended
June 30,   July 1, June 30,   July 1,
2018 2017 2018   2017
Weighted-average number of common and common equivalent shares
outstanding:
Basic number of common shares outstanding 46,437,093 47,863,618 46,604,599 48,093,155
Dilutive effect of equity awards 509,545   550,726   563,137   552,866  
Diluted number of common and common equivalent shares outstanding 46,946,638   48,414,344   47,167,736   48,646,021  

As reported on a GAAP Basis:

(dollars in thousands, except per share data)
Basic net income per common share:
Net income $ 37,268 $ 37,793 $ 79,737 $ 84,388
Income allocated to participating securities (276 ) (290 ) (600 ) (659 )
Net income available to common shareholders $ 36,992   $ 37,503   $ 79,137   $ 83,729  
Basic net income per common share $ 0.80 $ 0.78 $ 1.70 $ 1.74
Diluted net income per common share:
Net income $ 37,268 $ 37,793 79,737 84,388
Income allocated to participating securities (274 ) (288 ) (596 ) (654 )
Net income available to common shareholders $ 36,994   $ 37,505   79,141   83,734  
Diluted net income per common share $ 0.79 $ 0.77 $ 1.68 $ 1.72

As adjusted (a):

Basic net income per common share:
Net income $ 37,268 $ 38,594 $ 89,224 $ 86,368
Income allocated to participating securities (276 ) (297 ) (674 ) (675 )
Net income available to common shareholders $ 36,992   $ 38,297   $ 88,550   $ 85,693  
Basic net income per common share $ 0.80 $ 0.80 $ 1.90 $ 1.78
Diluted net income per common share:
Net income $ 37,268 $ 38,594 $ 89,224 $ 86,368
Income allocated to participating securities (274 ) (295 ) (670 ) (670 )
Net income available to common shareholders $ 36,994   $ 38,299   $ 88,554   $ 85,698  
Diluted net income per common share $ 0.79 $ 0.79 $ 1.88 $ 1.76
 
(a)   In addition to the results provided in this earnings release in
accordance with GAAP, the Company has provided adjusted, non-GAAP
financial measurements that present per share data excluding the
adjustments discussed above. The Company has excluded $9.5 million
from these results for the two fiscal quarters ended June 30, 2018,
respectively. The Company has excluded $0.8 million and $2.0 million
in after-tax expenses from these results for the fiscal quarter and
two fiscal quarters ended July 1, 2017, respectively.
 

Note: Results may not be additive due to rounding.

 
     
RECONCILIATION OF U.S. GAAP AND NON-GAAP INFORMATION

(unaudited)

 

The following table provides a reconciliation of net income to
EBITDA and Adjusted EBITDA for the periods indicated:

 
Four Fiscal
Fiscal Quarter Ended Two Fiscal Quarters Ended Quarters Ended
June 30, 2018   July 1, 2017 June 30, 2018   July 1, 2017 June 30, 2018
(dollars in millions)
Net income $ 37.3 $ 37.8 $ 79.7 $ 84.4 $ 298.2
Interest expense 7.9 7.2 15.9 14.3 31.7
Interest income (0.2 ) (0.1 ) (0.4 ) (0.2 ) (0.5 )
Income tax expense 11.0 19.9 21.4 45.1 64.6
Depreciation and amortization 21.8   20.8   43.8   40.6   87.7  
EBITDA $ 77.8   $ 85.7   $ 160.5   $ 184.1   $ 481.6  
 
Adjustments to EBITDA
Special employee compensation provision (a) $ $ $ $ $ 21.2
Customer bankruptcy charges (b) 12.8 12.8
Acquisition-related costs (c) 1.2 2.9 1.7
Store restructuring costs (d) (0.4 ) 2.3
Direct sourcing initiative (e) 0.1 0.3 0.1
Acquisition contingency fair value adjustment (f)         (3.6 )
Adjusted EBITDA $ 77.8   $ 87.0   $ 172.9   $ 187.3   $ 516.0  
 
(a)   Special employee compensation provision related to significant
benefit related to the enactment of the Tax Cuts and Jobs Act of
2017; includes $1.2 million in related payroll taxes.
(b) Related to the Toys "R" Us bankruptcy.
(c) Non-recurring costs incurred in connection with the Skip Hop and
Mexico business acquisitions.
(d) Net costs arising from unusual storm damage and related store
closures.
(e) Costs associated with the Company's direct sourcing initiative,
which include severance and relocation.
(f) Revaluation of the contingent consideration liability associated
with the Company's acquisition of Skip Hop.
 

Note: Results may not be additive due to rounding.

 

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 footnotes
(a) - (f) to the table above.

We present EBITDA and Adjusted EBITDA because we consider them 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 also afford
investors a view of what management considers to be the Company's core
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.

 
RECONCILIATION OF U.S. GAAP AND NON-GAAP INFORMATION

(dollars in millions)

(unaudited)

 

The table below reflects the calculation of constant currency for
total net sales of the International segment and consolidated net
sales for the fiscal quarter and two fiscal quarters ended June
30, 2018:

 

Fiscal Quarter Ended

Reported

Net Sales

June 30,

2018

 

Impact of

Foreign

Currency

Translation

 

Constant-

Currency

Net Sales

June 30,

2018

 

Reported

Net Sales

July 1, 2017

 

Reported

Net Sales

% Change

 

Constant-

Currency

Net Sales

% Change

 
Consolidated net sales $ 696.2 $ 2.6 $ 693.6 $ 691.8 0.6 % 0.3 %
International segment net sales $ 84.7 $ 2.6 $ 82.1 $ 82.6 2.6 % (0.6 )%
 
Two Fiscal Quarters Ended

Reported

Net Sales

June 30,

2018

Impact of

Foreign

Currency

Translation

Constant-

Currency

Net Sales

June 30,

2018

Reported

Net Sales

July 1, 2017

Reported

Net Sales

% Change

Constant-

Currency

Net Sales

% Change

 
Consolidated net sales $ 1,452.0 $ 5.4 $ 1,446.6 $ 1,424.6 1.9 % 1.5 %
International segment net sales $ 175.9 $ 5.4 $ 170.6 $ 159.0 10.6 % 7.3 %
 
 

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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