Carter’s Inc., one of the largest branded marketers in North America of apparel exclusively for babies and young children, saw third-quarter net sales decrease 8.1 percent to $818.6 million on a net income of $65 million.
In a Nutshell: “Historic and persistent inflation has continued to weigh on demand for our brands, and is adversely affecting many families raising young children,” said Michael D. Casey, Carter’s chairman and CEO.
Changes in foreign currency exchange rates used for translation in the first three quarters of fiscal 2022, as compared to the first three quarters of fiscal 2021, had an “unfavorable effect” on consolidated net sales of approximately 0.2 percent at $5.4 million.
In the third quarter and first three quarters of fiscal 2022, the company returned to shareholders a total of $94.5 million and $331.4 million, respectively, through share repurchases and cash dividends. During the third quarter, Carter’s repurchased and retired 0.9 million shares of its common stock for $65.4 million at an average price of $74.61 per share. In the first three quarters, the company repurchased and retired 2.9 million shares of its common stock for $241.8 million at an average price of $82.16 per share. These first three-quarters of repurchases represented approximately 7.2 percent of shares outstanding as of the beginning of fiscal year 2022.
Net Sales: Net sales at Carter’s decreased $123.7 million (5.1 percent) to $2.3 billion, driven by a decline in the company’s U.S. retail segment partially offset by the growth in its U.S. wholesale and international segments.
“This is the first holiday shopping season in over 40 years that consumers are weighed down by record inflation. The early indications suggest that holiday shopping may not be as robust as last year,” Casey said. “Accordingly, we have widened the range of our sales and earnings forecasts for the fourth quarter and year to reflect current market conditions.”
U.S. retail net sales declines 11 percent, which the company said reflects inflationary pressures driving lower consumer demand and the comparison to the prior-year period, which was bolstered by government stimulus payments.
“A year ago, families with young children were supported by unprecedented government stimulus payments to help them recover from the pandemic,” Casey said. “By comparison, this year, real wages are lower, gas and food prices remain elevated and many families have struggled to find baby formula given shortages this past year. The global recovery from the pandemic that began last year, and enabled Carter’s to achieve record profitability in 2021, has been disrupted by inflation and lingering supply chain delays.”
U.S. retail comparable net sales declined 9 percent, while U.S. wholesale and international net sales increased by 1.3 percent and 2.6 percent, respectively.
Operating income decreased $89.5 million to $269.6 million, compared to $359.1 million in the first three quarters of fiscal 2021. Operating margin was 11.7 percent, compared to 14.8 percent in the prior year period. Adjusted operating income—a non-GAAP measure—decreased $93.3 million to $269.6 million, compared to $362.9 million in the first three quarters of fiscal 2021.
Adjusted operating margin was 11.7 percent compared to 15 percent in the prior year period. The company said this principally reflects higher ocean freight rates, fixed cost deleverage on lower sales and increased inventory provisions, partially offset by lower performance-based compensation provisions, the benefit of closing low-margin stores and lower air freight expenses.
Net Earnings: Net income was $169.9 million, compared to $242.8 million in the first three quarters. Adjusted net income, a non-GAAP measure, was $185 million, compared to $245.6 million in the first three quarters. Net cash used in operations in the first three quarters of fiscal 2021 was $217.5 million, compared to net cash provided by operations of $7.3 million in the first three quarters of fiscal 2021. The decline reflected lower earnings and growth in inventory.
CEO’s Take: “Our supply chain performance continued to improve in the third quarter, but on-time deliveries are not yet back to pre-pandemic levels due to port congestion on the East Coast. There are indications that the global slowdown in consumer demand may result in improved deliveries, and lower product and transportation costs beginning in 2023,” Casey said. “Carter’s has a long history of weathering market disruptions and emerging stronger from them. We are focused on mitigating the effects of current market conditions through inventory management, improved price realization and expense control.”