Market Overview

Carter's, Inc. Reports Third Quarter Fiscal 2019 Results

Share:
  • Net sales $943 million, growth of 2%
  • Diluted EPS of $1.34, including non-cash charge of $0.53 related to the impairment of the Skip Hop tradename, compared to $1.53 in Q3 2018; adjusted diluted EPS $1.87, growth of 16%
  • Returned $215 million to shareholders through share repurchases and dividends in the first three quarters of fiscal 2019
  • Full year fiscal 2019 outlook: net sales growth of approximately 1.5%; adjusted diluted EPS growth of approximately 4%

Carter's, Inc. (NYSE:CRI), the largest branded marketer in North America of apparel exclusively for babies and young children, today reported its third quarter fiscal 2019 results.

"Our third quarter results include a non-cash charge to recognize the impairment of our Skip Hop tradename," said Michael D. Casey, Chairman and Chief Executive Officer. "Since its acquisition in 2017, Skip Hop has achieved good growth in sales, but the carrying value of its tradename has been impaired by the loss of its largest customer, Toys "R" Us, which closed last year, lower international demand, and higher product costs driven by tariffs imposed on China imports this year. Excluding the impairment charge, we exceeded our sales and earnings growth objectives in the third quarter. Our growth was driven by our wholesale and retail businesses, and reflects good demand for our fall and holiday product offerings. With fall-like weather arriving in more parts of the United States, we believe we are on track to achieve our 31st consecutive year of sales growth."

Consolidated Results

Third Quarter of Fiscal 2019 compared to Third Quarter of Fiscal 2018

Net sales increased $19.4 million, or 2.1%, to $943.3 million, primarily driven by growth in the Company's U.S. Wholesale and U.S. Retail segments. Changes in foreign currency exchange rates in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 adversely affected consolidated net sales in the third quarter of fiscal 2019 by $1.3 million, or 0.1%. On a constant currency basis (a non-GAAP measure), consolidated net sales increased 2.2% in the third quarter of fiscal 2019.

Operating income in the third quarter of fiscal 2019 decreased $19.7 million, or 19.0%, to $83.9 million, compared to $103.6 million in the third quarter of fiscal 2018. Third quarter fiscal 2019 results include a non-cash, pre-tax charge of $30.8 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. Third quarter fiscal 2018 results include $3.5 million in charges related to changes in the Company's business model in China. Operating margin decreased 230 basis points to 8.9%, compared to 11.2% in the third quarter of fiscal 2018.

Adjusted operating income (a non-GAAP measure, which excludes the unusual items noted above) increased $7.6 million, or 7.1%, to $114.7 million, compared to $107.1 million in the third quarter of fiscal 2018. Adjusted operating margin (a non-GAAP measure) increased 60 basis points to 12.2%, compared to 11.6% in the third quarter of fiscal 2018, which principally reflects improved gross margin and expense leverage.

Net income in the third quarter of fiscal 2019 decreased $11.5 million, or 16.0%, to $60.3 million, or $1.34 per diluted share, compared to $71.8 million, or $1.53 per diluted share, in the third quarter of fiscal 2018. Third quarter fiscal 2019 results include a non-cash, after-tax charge of $23.7 million related to the write-down of the Skip Hop tradename described above. Third quarter fiscal 2018 results include after-tax charges of $3.5 million related to changes in the Company's business model in China.

Adjusted net income (a non-GAAP measure, which excludes the unusual items noted above) increased $8.6 million, or 11.5%, to $83.9 million, compared to $75.3 million in the third quarter of fiscal 2018. Adjusted earnings per diluted share (a non-GAAP measure) in the third quarter of fiscal 2019 increased 16.2% to $1.87, compared to $1.61 in the third quarter of fiscal 2018.

First Three Quarters of Fiscal 2019 compared to First Three Quarters of Fiscal 2018

Net sales increased $42.9 million, or 1.8%, to $2.4 billion, driven by growth in the Company's U.S. Wholesale and U.S. Retail segments, partially offset by a net sales decline in the International segment. Changes in foreign currency exchange rates in the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018 adversely affected consolidated net sales in the first three quarters of fiscal 2019 by $6.4 million, or 0.3%. On a constant currency basis (a non-GAAP measure), consolidated net sales increased 2.1% in the first three quarters of fiscal 2019.

Operating income in the first three quarters of fiscal 2019 decreased $11.7 million, or 5.3%, to $209.1 million, compared to $220.8 million in the first three quarters of fiscal 2018. Fiscal 2019 year-to-date results include a $30.8 million charge related to the write-down of the Skip Hop tradename, expenses of $1.6 million related to organizational restructuring, a benefit of $2.1 million related to a favorable recovery in value of China-related inventories, and a $0.7 million reversal of store restructuring costs previously recorded during the third quarter of fiscal 2017. Fiscal 2018 year-to-date results include $15.9 million in net charges, principally related to the bankruptcy of a wholesale customer, Toys "R" Us, and charges related to changes in the Company's business model in China. Operating margin decreased 70 basis points to 8.6%, compared to 9.3% in the first three quarters of fiscal 2018.

Adjusted operating income (a non-GAAP measure which excludes the unusual items noted in the prior paragraph) increased $2.0 million, or 0.8%, to $238.7 million, compared to $236.8 million in the first three quarters of fiscal 2018. Adjusted operating margin (a non-GAAP measure) decreased 10 basis points to 9.9%, compared to 10.0% in the first three quarters of fiscal 2018, which principally reflects changes in customer mix, higher eCommerce shipping expenses, and higher product costs, partially offset by the elimination of operating losses in China due to the transition of the Company's business model in this market.

Net income in the first three quarters of fiscal 2019 decreased $12.9 million, or 8.5%, to $138.7 million, or $3.06 per diluted share, compared to $151.5 million, or $3.20 per diluted share, in the first three quarters of fiscal 2018. Fiscal 2019 year-to-date results include after-tax net charges totaling $28.3 million, comprised of $6.0 million related to early extinguishment of debt, in addition to the Skip Hop tradename impairment charge, organizational restructuring, favorable recovery in value of China-related inventories, and retail store restructuring items noted above. Fiscal 2018 year-to-date results include after-tax net charges totaling $13.0 million, principally related to the wholesale customer bankruptcy and changes in the Company's business model in China noted above.

Adjusted net income (a non-GAAP measure which excludes the unusual items noted above) increased $2.4 million, or 1.5%, to $166.9 million, compared to $164.5 million in the first three quarters of fiscal 2018. Adjusted earnings per diluted share (a non-GAAP measure) in the first three quarters of fiscal 2019 increased 5.7% to $3.68, compared to $3.48 in the first three quarters of fiscal 2018.

Cash flow from operations in the first three quarters of fiscal 2019 was $73.4 million compared to $21.4 million in the first three quarters of fiscal 2018. The increase reflects favorable timing of payments by customers.

See the "Reconciliation of GAAP to Adjusted Results" section of this release for additional disclosures and reconciliations regarding non-GAAP measures.

Business Segment Results

U.S. Retail Segment

Third Quarter of Fiscal 2019 compared to Third Quarter of Fiscal 2018

U.S. Retail segment sales increased $5.0 million, or 1.1%, to $464.1 million. U.S. Retail comparable sales decreased 0.6%, reflecting a decline in store sales which was partially offset by growth in eCommerce sales.

In the third quarter of fiscal 2019, the Company opened 14 stores and closed three stores in the United States.

First Three Quarters of Fiscal 2019 compared to First Three Quarters of Fiscal 2018

U.S. Retail segment sales increased $19.4 million, or 1.6%, to $1.3 billion. U.S. Retail comparable sales decreased 0.1%, reflecting growth in eCommerce sales which was offset by a decline in store sales.

In the first three quarters of fiscal 2019, the Company opened 23 stores and closed 22 stores in the United States. As of the end of the third quarter of fiscal 2019, the Company operated 845 retail stores in the United States.

U.S. Wholesale Segment

Third Quarter of Fiscal 2019 compared to Third Quarter of Fiscal 2018

U.S. Wholesale segment net sales increased $13.3 million, or 3.9%, to $352.3 million, reflecting increased demand for the Company's exclusive Carter's brands.

First Three Quarters of Fiscal 2019 compared to First Three Quarters of Fiscal 2018

U.S. Wholesale segment net sales increased $27.4 million, or 3.3%, to $856.7 million, driven by increased demand for the Company's exclusive Carter's brands, partially offset by discontinued sales to Toys "R" Us, Bon-Ton, and Sears, which in aggregate contributed approximately $16 million to net sales in the first three quarters of 2018.

International Segment

Third Quarter of Fiscal 2019 compared to Third Quarter of Fiscal 2018

International segment net sales increased $1.1 million, or 0.9%, to $127.0 million, principally reflecting growth in various markets outside of North America, partially offset by the transition of the Company's business model in China and the effects of foreign currency translation.

Changes in foreign currency exchange rates in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 adversely affected International segment net sales in the third quarter of fiscal 2019 by $1.3 million, or 1.0%. On a constant currency basis (a non-GAAP measure), International segment net sales increased 1.9%.

In the first quarter of fiscal 2019, the Company completed the transition of its China retail and wholesale operations to a licensing arrangement with a China-based retailer and wholesaler of young children's apparel.

First Three Quarters of Fiscal 2019 compared to First Three Quarters of Fiscal 2018

International segment net sales decreased $4.0 million, or 1.3%, to $297.8 million, reflecting unfavorable effects of foreign currency translation and the change in business model in China, partially offset by growth in various markets outside of North America.

Changes in foreign currency exchange rates in the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018 adversely affected International segment net sales in the first three quarters of fiscal 2019 by $6.4 million, or 2.1%. On a constant currency basis (a non-GAAP measure), International segment net sales increased 0.8%.

As of the end of the third quarter of fiscal 2019, the Company operated 198 retail stores in Canada and 44 retail stores in Mexico.

Return of Capital

In the third quarter and first three quarters of fiscal 2019, the Company returned to shareholders a total of $77.3 million and $215.0 million, respectively, through share repurchases and cash dividends as described below.

During the third quarter of fiscal 2019, the Company repurchased and retired 602,043 shares of its common stock for $55.0 million at an average price of $91.39 per share. In the first three quarters of fiscal 2019, the Company repurchased and retired 1,607,920 shares of its common stock for $147.5 million at an average price of $91.71 per share. Fiscal year-to-date through October 23, 2019, the Company has repurchased and retired a total of 1,773,753 shares for $162.8 million at an average price of $91.76 per share. All shares were repurchased in open market transactions pursuant to applicable regulations for such transactions. As of October 23, 2019, the total remaining capacity under the Company's previously announced repurchase authorizations was approximately $230 million.

In the third quarter of fiscal 2019, the Company paid a cash dividend of $0.50 per share totaling $22.3 million. In the first three quarters of fiscal 2019, the Company paid cash dividends of $0.50 per share each quarter totaling $67.5 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.

2019 Business Outlook

For the fourth quarter of fiscal 2019, the Company projects net sales will increase approximately 1% compared to the fourth quarter of fiscal 2018 and adjusted diluted earnings per share will increase approximately 1% compared to adjusted diluted earnings per share of $2.84 in the fourth quarter of fiscal 2018.

For fiscal 2019, the Company now projects net sales will increase approximately 1.5% (within the previously projected growth range of approximately 1% to 2%) compared to fiscal 2018 and adjusted diluted earnings per share will increase approximately 4% (previously projected growth range of approximately 4% to 6%) compared to adjusted diluted earnings per share of $6.29 in fiscal 2018. This fiscal 2019 adjusted earnings forecast excludes the following pre-tax items: 1) impairment charge of $30.8 million related to the write-down of the Skip Hop tradename asset; 2) charges totaling $7.8 million related to early extinguishment of debt; 3) expenses of $1.6 million related to organizational restructuring; 4) a benefit of $2.1 million related to a favorable recovery in value of China-related inventories, and 5) a $0.7 million reversal of store restructuring costs previously recorded during the third quarter of fiscal 2017.

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 2019, the Company adopted the Financial Accounting Standards Board's Accounting Standards Codification No. 842, Leases ("ASC 842"), which requires substantially all of its operating leases, including retail leases, to be recorded on the balance sheet as a right-of-use asset and lease liability. The adoption of ASC 842 had a material impact on the Company's consolidated balance sheets, but did not have a material impact on its consolidated statements of operations or statements of cash flows.

Conference Call

The Company will hold a conference call with investors to discuss third quarter fiscal 2019 results and its business outlook on October 24, 2019 at 8:30 a.m. Eastern Daylight Time. To participate in the call, please dial 334-777-6978. To listen to a live broadcast via the internet and view the accompanying presentation materials, please visit ir.carters.com and select links for "News & Events" followed by "Webcasts & Presentations". A replay of the call will be available shortly after the broadcast through November 3, 2019, at 888-203-1112 (U.S. / Canada) or 719-457-0820 (international), passcode 2521318. The replay will also be archived online on the "Webcasts & Presentations" page noted above.

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 nearly 1,100 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 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 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 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 fourth quarter of fiscal 2019 and fiscal year 2019, 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: 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; losing one or more major customers, vendors, or licensees due to competition, inadequate quality of the Company's products, or otherwise; negative publicity, including as a result of product recalls or otherwise; a failure to protect the Company's intellectual property; a failure to meet regulatory requirements, including those relating to product quality and safety; extreme or unseasonable weather conditions; 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; deflationary pressures on our selling price and increases in production costs; unsuccessful expansion into international markets or failure to successfully manage legal, regulatory, political and economic risks of the Company's existing operations, including unexpected changes in regulatory requirements and maintaining compliance with worldwide anti-bribery laws; disruptions, slow-downs, or strikes in the Company's supply chain, including disruptions resulting from increases in the cost of raw materials or labor, foreign supply sources, the Company's distribution centers, or in-sourcing capabilities; failure to successfully integrate acquired businesses; fluctuations in foreign currency exchange rates; the imposition of new regulations relating to imports, tariffs, 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

 

Three Fiscal Quarters Ended

 

September 28, 2019

 

September 29, 2018

 

September 28, 2019

 

September 29, 2018

Net sales

$

943,322

 

 

$

923,907

 

 

$

2,418,764

 

 

$

2,375,890

 

Cost of goods sold

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