Carters Inc: Form 10-Q for the period ended Jun 29, 2024

U.S. Retail

U.S. Retail segment net sales decreased $49.3 million, or 7.6%, to $597.9 million. The decrease in net sales was driven by lower traffic in our eCommerce channels and in our retail stores, in part due to ongoing macroeconomic headwinds negatively impacting families with young children, and decreased average selling prices per unit. These factors were partially offset by sales contribution of our new retail stores. Average selling prices per unit decreased low-single digits due to planned price reductions on select essential core products and an increased mix of clearance sales. Units sold decreased mid-single digits. Comparable net sales, including retail store and eCommerce, decreased 9.2% driven by the factors mentioned above.

U.S. Retail segment operating income decreased $22.8 million, or 41.3%, to $32.4 million, primarily due to a decrease in gross profit of $24.3 million, partially offset by a decrease in SG&A expenses of $3.0 million. Operating margin decreased 310 bps to 5.4%, primarily due to a 380 bps increase in SG&A rate, partially offset by a 100 bps increase in gross margin. The increase in gross margin was due to decreased average cost per unit sold, partially offset by a benefit in excess inventory provisions in the first two quarters of fiscal 2023 that did not reoccur in the first two quarters of fiscal 2024, and decreased average selling prices per unit mentioned above. Average cost per unit sold decreased mid-single digits due to decreased ocean freight rates. The increase in the SG&A rate was driven by fixed cost deleverage on decreased net sales, investments in optimizing our retail store fleet, increased retail store employee compensation costs, and increased marketing expense, partially offset by decreased performance-based compensation expense.

U.S. Wholesale

U.S. Wholesale segment net sales decreased $9.8 million, or 2.1%, to $457.0 million, driven by the timing of wholesale customer shipments and decreased sales to off-price wholesale channel customers as a result of our lower excess inventory levels. These factors were partially offset by increased sales of our exclusive Carter’s brands. Average selling prices per unit decreased mid-single digits, while units sold increased low-single digits.

U.S. Wholesale segment operating income increased $18.2 million, or 22.4%, to $99.5 million, primarily due to an increase in gross profit of $17.3 million and a decrease in SG&A expenses of $0.7 million. Operating margin increased 440 bps to 21.8%. The drivers of the increase in operating margin were a 440 bps increase in gross margin, partially offset by a 10 bps increase in SG&A rate. The increase in gross margin was driven by decreased average cost per unit sold, partially offset a benefit in excess inventory provisions and fabric purchase commitment charges in the first two quarters of fiscal 2023 that did not reoccur in the first two quarters of fiscal 2024, decreased average selling prices per unit mentioned above, and increased air freight. 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 and decreased performance-based compensation expense.

International

International segment net sales decreased $11.0 million, or 6.1%, to $171.0 million. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Mexican Peso, had a $1.6 million favorable effect on International segment net sales. The decrease in net sales was driven by decreased net sales in Canada and decreased demand from our international partners. These decreases were partially offset by growth in sales in our Mexico retail stores. Units sold decreased high-single digits.

Canadian comparable net sales, including retail stores and eCommerce, decreased 6.7% driven by decreased traffic in our eCommerce channels and in our retail stores as a result of macroeconomic headwinds and the late arrival of Spring weather, which negatively impacted demand for our Spring and warm weather offerings.

International segment operating income decreased $2.1 million, or 21.1%, to $7.7 million, primarily due to an increase in SG&A expenses of $5.4 million, partially offset by an increase in gross profit of $3.8 million. Operating margin decreased 90 bps to 4.5%. The decrease in operating margin was attributable to a 580 bps increase in the SG&A rate, partially offset by a 510 bps increase in gross margin. The increase in gross margin was due to decreased average cost per unit sold. Average cost per unit sold decreased high-single digits due to decreased ocean freight rates and product input costs. The increase in the SG&A rate was due to fixed cost deleverage on decreased sales, increased retail store employee compensation costs, and increased investments in our new Mexican retail stores, partially offset by decreased performance-based compensation expense.

Unallocated Corporate Expenses

Unallocated corporate expenses decreased $7.2 million, or 13.7%, to $45.2 million and unallocated corporate expenses, as a percentage of consolidated net sales, decreased 30 bps to 3.7%. The decrease as a percentage of consolidated net sales was driven by organizational restructuring charges in the first two quarters of fiscal 2023 that did not reoccur in the first two

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. Changes in foreign currency exchange rates used for translation in the second quarter of fiscal 2024, as compared to the second quarter of fiscal 2023, had an unfavorable effect on our consolidated net sales of approximately $0.4 million. Changes in foreign currency exchange rates used for translation in the first two quarters of fiscal 2024, as compared to the first two quarters of fiscal 2023, had a favorable effect on our consolidated net sales of approximately $1.6 million.

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 expense (income), 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 June 29, 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 generally 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 June 29, 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 June 29, 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 June 29, 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.