8-K: Carter's Inc. Reports Mixed Q3 Results, Reaffirms Full-Year Outlook While Raising EPS Guidance

Carter's Inc. announced its third quarter fiscal 2024 results, showing a decrease in sales and operating margin compared to the previous year, but exceeding internal sales and earnings objectives and raising its full year adjusted EPS outlook.

Summary

• Carter's Inc. reported a decrease in net sales for the third quarter of fiscal 2024, with $758 million compared to $792 million in the same period last year.
• The company's operating margin also declined to 10.2% from 11.8% in the third quarter of 2023.
• Diluted earnings per share (EPS) decreased to $1.62 from $1.78 year-over-year, while adjusted diluted EPS was $1.64 compared to $1.84.
• Despite these declines, Carter's exceeded its internal sales and earnings objectives for the quarter.
• The company reaffirmed its full-year net sales outlook of $2.785 billion to $2.825 billion and adjusted operating income of $240 million to $260 million.
• Carter's raised its adjusted diluted EPS outlook to $4.70 to $5.15 for the full fiscal year.
• The company returned $138 million to shareholders through dividends and share repurchases in the first three quarters of fiscal 2024.
• The company experienced a decrease in cash flow from operations, with $11.3 million in the first three quarters of 2024 compared to $205.8 million in the same period of 2023, primarily due to a smaller reduction in inventory this year.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While the company experienced declines in sales and profitability, it exceeded its own expectations, reaffirmed its full-year outlook, and raised its EPS guidance. The company is also taking steps to strengthen its market position and manage costs. However, the macroeconomic challenges and the decline in cash flow from operations temper the overall positive outlook.

Positives

• Carter's exceeded its third quarter sales and earnings objectives.
• U.S. Retail sales were better than planned, driven by strong product offerings and effective pricing and marketing strategies.
• The company saw improving trends in conversion rates, transactions, unit volume, and new customer acquisition compared to the first half of the year.
• Exclusive brands sold to mass channel retailers were a source of growth in the third quarter.
• Cash flow through September was better than planned, with a higher cash balance, no seasonal borrowings, and lower interest costs.
• The company has over $1 billion in liquidity.
• The company is reaffirming its previous outlook for sales and profitability this year.
• The company is raising its adjusted diluted EPS outlook for the full year.
• The company expects the cumulative distribution of capital through share repurchases and dividends to represent somewhat more than 100% of its projected fiscal year 2024 free cash flow.

Negatives

• Net sales decreased by 4.2% in the third quarter of fiscal 2024 compared to the same period last year.
• Operating income decreased by 17.5% in the third quarter of fiscal 2024 compared to the same period last year.
• Operating margin decreased to 10.2% from 11.8% in the third quarter of 2023.
• U.S. Retail comparable net sales declined by 7.1% in the third quarter.
• Sales in the International business were lower than last year.
• Net cash provided by operations decreased significantly to $11.3 million in the first three quarters of 2024 compared to $205.8 million in the same period of 2023.
• The company paused share repurchases during the third quarter of fiscal 2024.

Risks

• Macroeconomic factors, including inflation and higher interest rates, have negatively impacted demand for the company's brands.
• Families with young children, the company's primary customer base, have reduced their discretionary spending due to financial pressures.
• The company is facing challenges in its international business, including slower sales in Canada and lower wholesale shipments to the Middle East and Europe.
• Changes in foreign currency exchange rates have had an unfavorable effect on consolidated net sales.
• The company is experiencing fixed cost deleverage due to lower sales.
• The company is making investments in pricing, marketing, and stores, which are impacting operating margins.
• The company is facing increased competition in the marketplace.
• The company is exposed to risks related to geopolitical conflict, public health crises, and potential shutdowns of the U.S. government.
• The company is exposed to risks related to supply chain disruptions and increased transportation costs.
• The company is exposed to risks related to a potential shutdown of the U.S. government.

Future Outlook

The company is reaffirming its full-year net sales and adjusted operating income outlook and raising its adjusted diluted EPS outlook. The company expects continued macroeconomic pressure on consumer demand in the fourth quarter and is planning to invest approximately $30 million in pricing and brand marketing.

Management Comments

• We exceeded our third quarter sales and earnings objectives, said Michael D. Casey, Chairman and Chief Executive Officer.
• Our U.S. Retail sales were better than planned and driven by the strength of our product offerings, and effectiveness of our pricing and brand marketing strategies.
• We plan to use this down cycle to strengthen our leading market position as the best-selling national brand in young childrens apparel.

Industry Context

The results reflect the broader challenges faced by retailers in the current economic environment, including inflationary pressures and reduced consumer spending. Carter's is leveraging its position as a major supplier to large retailers like Target, Walmart, and Amazon, which are benefiting from consumers' preference for one-stop shopping. The company is also investing in pricing and marketing to improve its competitive position.

Comparison to Industry Standards

• Carter's is the largest branded marketer in North America of apparel exclusively for babies and young children, making direct comparisons challenging.
• Competitors such as The Children's Place and other apparel retailers are also facing similar macroeconomic headwinds, including inflation and reduced consumer spending.
• Carter's focus on mass-market retailers like Target, Walmart, and Amazon provides a competitive advantage compared to companies more reliant on department stores or specialty retailers.
• The company's investment in pricing and marketing is a common strategy among retailers to maintain market share during economic downturns.
• The company's decision to pause share repurchases is a common strategy to preserve cash during periods of uncertainty.

Stakeholder Impact

• Shareholders will be impacted by the decrease in earnings per share and the pause in share repurchases, but also by the increased EPS guidance and the return of capital through dividends.
• Employees may be affected by the company's cost reduction initiatives and organizational restructuring.
• Customers may benefit from the company's investments in pricing and improved shopping experiences.
• Suppliers may be impacted by changes in the company's sourcing arrangements and supply chain.
• Creditors may be impacted by the company's debt levels and cash flow.

Next Steps

• The company will hold a conference call with investors on October 25, 2024, to discuss the third quarter results and business outlook.
• The company plans to continue investing in pricing and brand marketing in the fourth quarter of fiscal 2024.
• The company anticipates the termination of the OshKosh BGosh Pension Plan on November 30, 2024.

Key Dates

Keywords

Carters, CRI, Apparel, Childrenswear, Retail, Wholesale, E-commerce, Financial Results, Earnings, Operating Margin, EPS, Share Repurchase, Dividends, Inflation, Consumer Spending