Carters Inc: Form 10-Q for the period ended Mar 30, 2024

Comparable Sales Metrics

We present comparable sales metrics because we consider them an important supplemental measure of our U.S. Retail and International performance, and the Company uses such information to assess the performance of the U.S. Retail and International segments. Additionally, we believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of our business.

Our comparable sales metrics include sales for all stores and eCommerce sites that were open and operated by us during the comparable fiscal period, including stand-alone format stores that converted to multi-branded format stores and certain remodeled or relocated stores. A store or site becomes comparable following 13 consecutive full fiscal months of operations. If a store relocates within the same center with no business interruption or material change in square footage, the sales of such store will continue to be included in the comparable store metrics. If a store relocates to another center more than five miles away, or there is a material change in square footage, such store is treated as a new store. Stores that are closed during the relevant fiscal period are included in the comparable store sales metrics up to the last full fiscal month of operations.

The method of calculating sales metrics varies across the retail industry. As a result, our comparable sales metrics may not be comparable to those of other retailers.

U.S. Retail

U.S. Retail segment net sales decreased $16.1 million, or 5.0%, to $307.6 million. The decrease in net sales was driven by lower traffic in our eCommerce channels as a result of decreased consumer demand on more discretionary purchases and decreased average selling prices per unit, partially offset by sales contribution of our new retail stores. Average selling prices per unit decreased mid-single digits due to planned price reductions on select essential core products and an increased mix of clearance sales. Units sold decreased low-single digits.

Comparable net sales, including retail store and eCommerce, decreased 6.8% primarily driven by the factors mentioned above. As of March 30, 2024, we operated 789 retail stores in the U.S. compared to 792 as of December 30, 2023, and 760 as of April 1, 2023.

U.S. Retail segment operating income decreased $12.6 million, or 46.9%, to $14.3 million, due to a decrease in gross profit of $10.0 million and an increase in SG&A expenses of $2.1 million. Operating margin decreased 370 bps to 4.6%. The primary drivers of the decrease in operating margin were a 20 bps decrease in gross margin and a 340 bps increase in SG&A rate. The decrease in gross margin was due to decreased average selling prices per unit mentioned above, partially offset by decreased average cost per unit sold and decreased fabric purchase commitment charges. Average cost per unit sold decreased low-single digits due to decreased ocean freight rates. The increase in SG&A rate was driven by fixed cost deleverage on decreased sales, fleet optimization, including retail store openings and new store formats and remodels, and increased retail store employee costs.

U.S. Wholesale

U.S. Wholesale segment net sales decreased $15.9 million, or 5.7%, to $264.1 million, driven by the timing of wholesale customer shipments and decreased sales to off-price wholesale channels as a result of our improved excess inventory levels. Average selling prices per unit decreased mid-single digits, while units sold decreased low-single digits. These factors were partially offset by increased sales of our exclusive Carter’s brands and our Little Planet brand.

U.S. Wholesale segment operating income increased $11.2 million, or 21.6%, to $63.3 million, due to an increase in gross profit of $10.3 million and a decrease in SG&A expenses of $1.1 million. Operating margin increased 540 bps to 24.0%. The primary drivers of the increase in operating margin were a 560 bps increase in gross margin, partially offset by a 20 bps increase in SG&A rate. The increase in gross margin was driven by decreased average cost per unit sold, partially offset by customer mix. Average cost per unit sold decreased low teens due to decreased ocean freight rates and product input costs. The increase in the SG&A rate was driven by fixed cost deleverage on decreased sales and increased marketing costs, partially offset by decreased transportation costs.

International

International segment net sales decreased $2.5 million, or 2.7%, to $89.7 million. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Mexican Peso, had a $2.0 million favorable effect on International segment net sales. The decrease in net sales was driven by decreased net eCommerce sales in Canada as a result of decreased consumer demand on more discretionary purchases and decreased demand from our international partners. These decreases were partially offset by

Currency and Interest Rate Risks

In the operation of our business, we have market risk exposures including those related to foreign currency risk and interest rates. These risks, and our strategies to manage our exposure to them, are discussed below.

Currency Risk

We contract for production with third parties, primarily in Asia. While these contracts are stated in U.S. dollars, there can be no assurance that the cost for the future production of our products will not be affected by exchange rate fluctuations between the U.S. dollar and the local currencies of these contractors. Due to the number of currencies involved, we cannot quantify the potential impact that future currency fluctuations may have on our results of operations in future periods.

The financial statements of our foreign subsidiaries that are denominated in functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in Accumulated other comprehensive income (loss).

Our foreign subsidiaries typically record sales denominated in currencies other than the U.S. dollar, which are then translated into U.S. dollars using weighted-average exchange rates. The changes in foreign currency exchange rates used for translation in the first quarter of fiscal 2024, compared to the first quarter of fiscal 2023, had a $2.0 million favorable effect on our consolidated net sales.

Fluctuations in exchange rates between the U.S. dollar and other currencies may affect our results of operations, financial position, and cash flows. Transactions by our foreign subsidiaries may be denominated in a currency other than the entity’s functional currency. Foreign currency transaction gains and losses also include the impact of intercompany loans with foreign subsidiaries that are marked to market. In our condensed consolidated statement of operations, these gains and losses are recorded within Other (income) expense, net. Foreign currency transaction gains and losses related to intercompany loans with foreign subsidiaries that are of a long-term nature are accounted for as translation adjustments and are included in Accumulated other comprehensive income (loss).

Interest Rate Risk

Our operating results are subject to risk from interest rate fluctuations on our secured revolving credit facility, which carries variable interest rates. As of March 30, 2024, there were no variable rate borrowings outstanding under the secured revolving credit facility. As a result, the impact of a hypothetical 100 bps increase in the effective interest rate would not result in a material amount of additional interest expense over a 12-month period.

Other Risks

We enter into various purchase order commitments with our suppliers. We can cancel these arrangements, although in some instances we may be subject to a termination charge reflecting a percentage of work performed prior to cancellation.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of March 30, 2024.

Changes in Internal Control over Financial Reporting

The Principal Executive Officer and Principal Financial Officer also conducted an evaluation of the Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the fiscal quarter ended March 30, 2024, that have materially affected, or which are reasonably likely to materially affect, Internal Control.

There were no changes in the Company’s Internal Control that materially affected, or were likely to materially affect, such control over financial reporting during the fiscal quarter ended March 30, 2024.

There have been no material changes to the risk factors described in our Form 10-K for the 2023 fiscal year ended December 30, 2023.