Carter’s saw both sales and earnings miss fourth-quarter estimates, but if the retailer has one major bright spot, it’s that it has been able to rely on retail’s big guns throughout the pandemic, as sales of its exclusive brands across Amazon, Target and Walmart grew a combined 13 percent.
Total net sales at Carter’s fell 10.1 percent to $989.9 million, below estimates of $1.06 billion from analysts polled by FactSet. Adjusted earnings dipped 12.5 percent to $2.46 a share, under expectations of $2.73 a share.
In a Nutshell: While the Big Three retailers have driven solid revenue for Carter’s, the infant and children’s wear retailer hasn’t performed well in the overall wholesale segment, which saw sales decline 16.9 percent to $290 million, a number that’s likely to reflect brick-and-mortar closures amid social-distancing regulations.
In fact, more of Carter’s sales are actually shifting toward retail. While wholesale dipped from 31.7 percent of sales to 29.3 percent of sales over the past year, the retail segment jumped from 56.3 percent of sales to 59.2 percent of the business. International sales slid slightly from 12 percent to 11.5 percent.
Chairman and CEO Michael D. Casey noted in an earnings call that those who did enter stores in the quarter “came to buy,” with store conversion rates growing 5 percent in the period and average transaction values up 9 percent, driven by higher units per transaction and better price realization.
Overall, net inventories increased 1 percent from $593.9 million to $599.2 million year over year, with the company saying it reflects strong inventory management, improved sell-through and continued progress reducing excess inventory. Offloading inventory in recent seasons has been a vital move for Carter’s, which employed a “pack and hold” strategy last summer to stash away as much as $110 million of unshipped spring and summer product before unleashing it in 2021.
“We ran much leaner in store inventories in the fourth quarter, and we focused our inventories less on promotions, and more on the [strength] of our product offerings,” Casey said.
The leaner inventories and more effective marketing directly contributed to record quarterly gross margin, which increased 460 basis points (4.6 percentage points) to 47.1 percent of sales in the fourth quarter, from 42.5 percent in the year-ago period.
Gross margin also was boosted by in part by the increase in omnichannel fulfillment demands. While only 12 percent of shoppers used BOPIS, curbside pickup, ship-to-store or deliver from store in the fourth quarter of 2019, this rose to 24 percent to close 2020. This figure is expected to jump to 40 percent by 2025.
As of Jan. 2, Carter’s operated 1,101 namesake and OshKosh B’gosh stores, with 864 locations in the U.S. The company confirmed that it would close 115 U.S. stores in 2021 as part of the more than 200 it already said it planned to shutter when select leases expired. Eight percent of the total closures are scheduled by the end of 2022, according to Casey.
To close the 2020 fiscal year, Carter’s had a record operating cash flow of $589.9 million compared to $387.2 million in 2019. The increase was primarily due to an extension of vendor payment terms and deferrals of retail store lease payments, partially offset by lower earnings related to Covid-19. Through 2025, the company expects to generate $1.7 billion in operating cash flow.
Total liquidity at the end of the fourth quarter of fiscal 2020 was $1.8 billion, comprised of cash and cash equivalents of $1.1 billion and approximately $745 million in available borrowing capacity on its secured revolving credit facility. The company says this liquidity is sufficient for the foreseeable future to maintain its operations and manage through the Covid-19 pandemic.
For the upcoming year, Carter’s projects net sales will increase approximately 5 percent and adjusted diluted earnings per share will increase approximately 10 percent from the $4.16 number generated in fiscal 2020.
This forecast bakes in the lingering effects of the pandemic and the expecting front-loading of sales and EPS growth in the first half of the year, but it excludes approximately $7 million of Covid-related costs, such as PPE and cleaning supplies.
For the first quarter, Carter’s anticipates net sales will be comparable to the first quarter of fiscal 2020 (flat at approximately $654 million), while adjusted diluted earnings per share will be approximately 25 cents—up from the loss of 81 cents in the year-ago period. The projection includes both the pandemic’s effects and the adverse outcomes of transportation delays, but excludes the approximately $3 million to be spent on PPE and cleaning supplies.
Net Sales: Net sales decreased 10.1 percent, to $989.9 million, compared to $1.1 billion in the fourth quarter of fiscal 2019, with sales declining in all three of the company’s segments principally due to pandemic-related disruptions.
The U.S. wholesale segment declined 16.9 percent to $290 million in the quarter, reflecting lower shipments to certain customers, in part due to the retailer’s decision to reduce fall and winter inventory commitments, as well as many partners choosing to push orders back.
The dip is partially offset by the continued momentum in sales of exclusive brands to Target, Walmart, and Amazon, which grew 13 percent and represented the best-performing channels.
The U.S. retail segment saw net sales decreases of 5.5 percent to $585.8 million, while comparable sales declined 9 percent, reflecting a decline in store sales. E-commerce growth jumped 16 percent, with total e-commerce penetration up to 45 percent of sales compared to 36 percent to close 2019.
Internationally, sales declined 13.4 percent to $114 million, with Carter’s attributing the dip to reduced wholesale channel shipments outside of North America and the adverse effects of lower traffic and store closures in Canada. E-commerce growth in Canada was more robust than its U.S. counterpart at 47 percent.
Consolidated net sales decreased $495 million for the full 2020 year, or 14.1 percent to $3 billion. This was primarily reflected by numerous factors, including the temporary closure of Carter’s company-operated stores mainly during March, April, and May and many of the company’s Canada and Mexico stores in December, as well as decreased sales to certain wholesale customers due to Covid-19 disruption.
Net Earnings: In the fourth quarter, net income at Carter’s decreased 20.9 percent to $99 million, or $2.26 per diluted share, compared to $125.1 million or $2.82 per diluted share, in the year-ago period. Adjusted net income decreased 13.5 percent to $107.9 million, compared to $124.7 million in the fourth quarter of fiscal 2019. Adjusted earnings per diluted share decreased 12.5 percent to $2.46, compared to $2.81 in the fourth quarter of fiscal 2019.
Operating income dipped 17.8 percent to $133.9 million from $162.8 million in the 2019 fourth quarter, with operating margin decreasing 130 basis points to 13.5 percent.
For fiscal 2020, the children and baby apparel retailer took in $109.7 million in net income, or $2.50 per diluted share, plummeting 57 percent from $263.8 million, or $5.85 per diluted share, generated in fiscal 2019. Adjusted net income dropped from $291.7 million to $182.6 million during that span. Adjusted earnings per diluted share was $4.16, compared to $6.46 in fiscal 2019.
Operating income in fiscal 2020 was $189.9 million, compared to $371.9 million in fiscal 2019. Adjusted operating income was $279.8 million compared to $401 million last year, with the decrease reflecting the decline in net sales, increased inventory provisions and lower royalty income, partially offset by a reduction in selling, general and administrative expenses.
CEO’s Take: Casey noted that Carter’s saw delays in the receipt of products from Asia, with its suppliers running on average 10 days late due to Covid-related challenges, West Coast port congestion and transportation delays.
“Our wholesale customers are challenged by the same delays,” Casey said. “There’s late arrivals of our warm-weather products, and there is plenty of warm weather ahead of us. To date, we have not experienced any meaningful order cancellations, but that’s higher risk than usual, given the abnormal delays and deliveries from Asia.”