Carter’s saw net sales for the fourth quarter increase 7.3 percent, with comp-store sales rose 15 percent, though freight costs weighed on earnings.
In a Nutshell: “As expected, earnings in the quarter reflected higher provisions for air freight, which helped us keep our largest wholesale customers in a better in-stock position over the holidays than would have otherwise been possible,” CEO Michael Casey told Wall Street analysts in a conference call Friday.
The children’s wear retailer is also seeing production improve with partners hit by the summer’s delta-fueled Covid-19 outbreak.
“What we’re most encouraged by is the production levels in Asia are improving,” Casey said. “This time last year many suppliers that we do business with… their employees very low vaccination rates; vaccination rates were probably less than 20 percent.”
As of now, Cambodia, Vietnam, and other major sourcing countries have “vaccination rates over 90 percent,” Casey continued, with attendance rates topping 90 percent. “So production levels are meaningfully better than they were last year. We expect that that will continue to improve through the balance of this year. The issue we have is [the] transportation delays for all the things that you’ve read about, particularly on the West Coast ports. But even recent articles would suggest things are improving on the West Coast.”
In reporting fourth quarter results, Carter’s laid out its forecasts for the first quarter and half and for fiscal year 2022.
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For the first quarter, Carter’s, which owns the Carter’s and OshKosh B’gosh brands, projected first quarter net sales of approximately $740 million to $750 million, adjusted operating income of about $85 million to $90 million compared to $128.5 million in the first quarter of fiscal 2021, and adjusted diluted earnings per share (EPS) of $1.25 to $1.35 compared to adjusted diluted EPS of $1.98 in the first quarter of fiscal 2021.
The company, which sells its products through nearly 1,000 company-operated stores in the United States, Canada and Mexico and online, said the lower sales outlook was due to the “non-comping benefit of significant government stimulus in 2021, prior-year store closures, Easter holiday demand shift into the second quarter and lingering supply chain delays.”
Carter’s also expects to see a higher mix of off-price channel sales to clear late fall 2021 deliveries, continued market recovery from Covid-19, a benefit from higher vaccination rates and continued progress improving price realization to mitigate impact of inflation.
For the first half of 2022, the company forecasted net sales of approximately $1.55 billion to $1.57 billion, adjusted operating income of around $195 million to $205 million compared to adjusted operating income of $239 million in the first half of 2021, and adjusted diluted EPS estimated at $3.05 to $3.25 compared to adjusted diluted EPS of $3.64 in the first half of 2021.
For all of 2022, the company projected a net sales increase of around 2 percent to 3 percent, with growth in all segments; an adjusted operating income gain of about 4 percent to 6 percent compared to adjusted operating income of $500.8 million in 2021, and adjusted diluted earnings per share increase of approximately 12 percent to 14 percent compared to adjusted diluted EPS of $7.87 in 2021.
The company’s forecast for fiscal 2022 reflects the strength of merchandising and marketing initiatives, a better mix and level of inventories, gradual improvement in supply chain performance, improved price realization, lower incentive compensation provisions, lower interest expense and the benefit of share repurchases.
The company also offered an outlook for the five-year period 2021 through 2026 that included low single-digit net sales growth, mid single-digit adjusted operating income growth and high single-digit adjusted diluted EPS growth.
Atlanta-based Carter’s said it intends to redeem its 5.5 percent senior notes in the first quarter, subject to market conditions, using cash on hand. Redemption of the notes will require payment of an early redemption premium, which along with transaction fees and unamortized debt issuance costs is estimated to result in a loss on extinguishment of debt of approximately $21 million in the first half and that its adjusted diluted EPS forecasts exclude this estimated charge.
The company also plans to evaluate a potential refinancing of its 5.625 percent senior notes in 2022, subject to market conditions, which may result in an additional charge related to loss on extinguishment of debt.
Net cash provided by operations in 2021 was $268.3 million compared to $588.5 million in 2020. The decrease was indicative of strong growth in net income offset by the normalization of vendor payment terms that were extended during the early days of the pandemic in 2020.
Sales: Net sales for the fourth quarter increased 7.3 percent to $1.06 billion. The additional week in the fourth quarter of fiscal 2020 contributed approximately $32.1 million in net sales. On a comparable week basis, net sales grew 10.9 percent.
The company’s U.S. retail and wholesale, and international segments grew 3 percent, 9 percent and 25 percent, respectively. U.S. retail segment comparable sales increased 15 percent, driven by improved store sales. Sales in all segments in the fourth quarter were adversely affected by Covid-related disruptions.
For the year, net sales increased 15.3 percent to $3.5 billion, driven by strong growth in all segments. The additional week in fiscal 2020 contributed approximately $32.1 million in consolidated net sales.
On a comparable week basis, net sales grew 16.5 percent. The company’s U.S. retail and wholesale, and international segments grew 14 percent, 13 percent and 29 percent, respectively. The company said fiscal 2020 was adversely impacted by the temporary closure of its stores in March, April, and May, and reduced demand in other businesses as a result of disruptions related to Covid-19.
Earnings: Net income in the quarter decreased 2.1 percent to $97 million, compared to $99 million in the fourth quarter of fiscal 2020. EPS increased 2.2 percent to $2.31, compared to $2.26 in the prior-year period.
Operating income increased 3.1 percent to $138 million. Operating margin decreased 50 basis points to 13 percent, reflecting higher transportation costs, the release of inventory reserves in the prior year, increased compensation provisions and higher charitable donations, partially offset by strong product demand, including improved price realization.
For the year, net income rose 209.7 percent to $339.7 million from $109.7 million in 2020. Earnings per diluted share increased 212.4 percent to $7.81, compared to $2.50 in the prior-year period.
Operating income increased 161.8 percent to $497.1 million. Operating margin increased 800 basis points to 14.3 percent, reflecting strong product demand, including improved price realization, partially offset by increased compensation provisions, higher transportation costs, the absence of Covid-related inventory provisions, and investments in marketing and omnichannel capabilities.
CEO’s Take: Casey said: “We saw strong demand for our brands in the fourth quarter, which enabled us to exceed our sales and earnings objectives. We achieved sales growth in each of our retail, wholesale and international segments. Our fourth quarter earnings reflect the benefits from strong holiday demand for our brands and improved price realization, which helped mitigate higher provisions for air freight, technology, performance-based compensation and charitable donations.”
“For the year, we achieved a record level of profitability, which we believe was driven by structural changes made to our business during the pandemic, including the rationalization of product choices, closure of low margin stores, leaner inventories, more impactful and effective marketing, and improved price realization,” Casey added. “We believe these changes have enabled profit margins which are sustainable and provide a stronger foundation to build on in the years ahead. We are planning good growth in sales and earnings in 2022 driven by the strength of our brands, compelling value of our product offerings and…multi-channel model that provides the most extensive distribution of children’s apparel in North America.”
Additional reporting by Jessica Binns.