Carters Inc: Form 10-Q for the period ended Sep 28, 2024

rate. The decrease in gross margin was driven by a benefit in excess inventory provisions in the third quarter of fiscal 2023 that did not reoccur in the third quarter of fiscal 2024 and decreased average selling prices per unit mentioned above, partially offset by decreased average cost per unit sold. Average cost per unit sold decreased mid-single digits due lower product input costs, partially offset by increased inbound freight costs. The increase in SG&A rate was driven by fixed cost deleverage on decreased net sales, investments in our brand marketing and retail stores, increased retail store employee compensation costs, and increased transportation costs, partially offset by decreased performance-based compensation expense.

U.S. Wholesale

U.S. Wholesale segment net sales decreased $1.4 million, or 0.5%, to $299.0 million, driven by lower seasonal demand for our Carter’s brands, decreased sales to off-price wholesale channel customers as a result of our lower excess inventory levels, unfavorable timing of wholesale shipments, and decreased average selling prices per unit, partially offset by growth in our exclusive Carter’s brands and our Little Planet brand. Units sold increased low-single digits, while average selling prices per unit decreased low-single digits.

U.S. Wholesale segment operating income decreased $2.6 million, or 3.9%, to $63.1 million, primarily due to a decrease in gross profit of $1.7 million and an increase in SG&A expenses of $0.6 million. Operating margin decreased 80 bps to 21.1%. The primary drivers of the decrease in operating margin were a 40 bps decrease in gross margin and a 30 bps increase in SG&A rate. The decrease in gross margin was driven by decreased average selling prices per unit mentioned above and a benefit in excess inventory provisions in the third quarter of fiscal 2023 that did not reoccur in the third quarter of fiscal 2024, partially offset by decreased average cost per unit sold and decreased off-price wholesale channel sales. Average cost per unit sold decreased mid-single digits due to decreased product input costs partially offset by increased inbound freight costs. The increase in the SG&A rate was driven by fixed cost deleverage on decreased sales, increased distribution costs, and investments in brand marketing, partially offset by decreased performance-based compensation expense.

International

International segment net sales decreased $10.0 million, or 8.6%, to $106.5 million. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Mexican Peso, had a $3.1 million unfavorable effect on International segment net sales. The decrease in net sales was driven by decreased net sales in Canada, decreased demand from our international partners, and decreased average selling prices per unit, partially offset by growth in sales in our retail stores in Mexico. Units sold and average selling prices per unit both decreased mid-single digits.

Canadian comparable net sales, including retail stores and eCommerce, decreased 6.8%, driven by decreased traffic in our retail stores and eCommerce channels as a result of macroeconomic headwinds and a slower start to cooler weather apparel sales. As of September 28, 2024, we operated 188 stores and 56 stores in Canada and Mexico, respectively. As of December 30, 2023, we operated 188 and 54 stores in Canada and Mexico, respectively. As of September 30, 2023, we operated 188 and 53 stores in Canada and Mexico, respectively.

International segment operating income decreased $3.1 million, or 23.5%, to $10.2 million, primarily due to a decrease in gross profit of $3.4 million, partially offset by a decrease in SG&A expenses of $0.3 million. Operating margin decreased 190 bps to 9.6%, primarily due to a 310 bps increase in the SG&A rate, partially offset by a 120 bps increase in gross margin. The increase in gross margin was due to decreased average cost per unit sold, partially offset by decreased average selling prices per unit mentioned above. Average cost per unit sold decreased high-single digits due to decreased product input costs. The increase in the SG&A rate was driven by fixed cost deleverage on decreased sales and increased bad debt expense, partially offset by decreased performance-based compensation expense.

Unallocated Corporate Expenses

Unallocated corporate expenses include corporate overhead expenses that are not directly attributable to one of our business segments and include unallocated accounting, finance, legal, human resources, and information technology expenses, occupancy costs for our corporate headquarters, and other benefit and compensation programs, including performance-based compensation.

Unallocated corporate expenses decreased $10.0 million, or 29.7%, to $23.6 million and unallocated corporate expenses, as a percentage of consolidated net sales, decreased 110 bps to 3.1%. The decrease as a percentage of consolidated net sales was driven by decreased performance-based compensation expense, organizational restructuring costs, and consulting costs, partially offset by fixed cost deleverage on decreased sales and increased charitable donations.

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 third quarter of fiscal 2024, as compared to the third quarter of fiscal 2023, had an unfavorable effect on our consolidated net sales of approximately $3.1 million. Changes in foreign currency exchange rates used for translation in the first three quarters of fiscal 2024, as compared to the first three quarters of fiscal 2023, had an unfavorable effect on our consolidated net sales of approximately $1.5 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 September 28, 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 material 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 September 28, 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 September 28, 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 September 28, 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.