Carter’s is reshuffling its store deck, with the infant and children’s wear company set to close approximately 25 percent—or more than 200—of its 850 U.S. stores as leases expire. Alongside these closures, the kid’s wear specialist has plans to open nearly 100 new co-branded stores with sister brand OshKosh B’gosh over the next five years, chairman and CEO Michael D. Casey said in a third-quarter earnings call.
Nearly 60 percent of the closures could occur by the end of 2021, while 80 percent are planned by 2022. Casey noted that these are generally “older, low-margin stores in declining centers and less likely to support our focus on high-value omnichannel customers.”
In a Nutshell: Despite an 8.3 percent net sales decline the third quarter to $865.1 million, Casey noted that the company exceeded both sales and earnings goals in the period.
“The quarter got off to a strong start with our Fourth of July holiday retail sales up 7 percent,” Casey said. “We saw less robust demand in August during the back-to-school shopping period with many children beginning their school year at home and learning virtually. We had the strongest level of demand in September with our Labor Day holiday retail sales up 15 percent, our best performance in three years.”
While store traffic was lower due to the Covid-19 restrictions and overall decline in store traffic, both in-store conversion rates and units purchased per transaction improved.
Casey said in the earnings call that the lower store performance in the quarter was “largely offset by stronger growth in e-commerce sales,” which improved 17.2 percent year over year.
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“Given the mix and level of e-commerce inventories, we were less promotional than last year,” Casey said. “And as a result, we significantly improved price realization and e-commerce profitability in the quarter.” Stores fulfilled 24 percent of e-commerce orders in the period, with Carter’s now offering same-day and curbside pickup in 600 stores.
Another common theme throughout the call was the company’s heavy curtailing of inventory in anticipation of its partners running leaner. Total inventories at Carter’s totaled $646.6 million in the third quarter, a 10.6 percent drop from the $723.2 million on hand at this point last year.
“The wholesale performances (which declined 14.2 percent year over year) reflects more curtailment of inventories. I’d rank that higher than the conservative planning by our wholesale customers,” Casey said. “We cut fall and holiday inventories for our wholesale customers back some portion of 30 percent or more earlier this year but I’m glad we did.”
Carter’s launched its Little Baby Basics product offering in late June to coincide with its store openings, which is now the core of its baby product offerings and the best-selling newborn apparel in the U.S., according to Casey.
Given the current market disruption caused by the Covid-19 pandemic, recent spikes in confirmed cases of the virus and related uncertainty on the timing and extent of the market recovery, Carter’s is not providing fiscal 2020 sales and earnings guidance.
During the quarter, Carter’s repaid $244 million in outstanding borrowings under its $750 million secured revolving credit facility using cash on hand.
The retailer’s total liquidity at the end of the quarter was $1.6 billion, comprised of cash and cash equivalents of $831 million and approximately $740 million in available borrowing capacity on its secured revolving credit facility.
Carter’s continues to believe it has sufficient liquidity for the foreseeable future to maintain its operations and manage through the disruption caused by the Covid-19 pandemic.
Net Sales: In the third quarter, net sales decreased $78.2 million, or 8.3 percent, to $865.1 million, compared to $943.3 million in the prior-year quarter.
Carter’s says the decline reflects decreased sales to certain wholesale customers, decreased traffic to company-operated stores, and decreased back-to-school sales (all a result of ongoing disruptions related to the Covid-19 pandemic), partially offset by strong e-commerce channel growth.
U.S. retail segment comparable sales declined 3.5 percent, reflecting a retail store decline, partially offset by e-commerce growth of 17.2 percent. E-commerce continues to be our fastest-growing and highest-margin business.
U.S. retail generated $449.1 million in sales, or 51.9 percent of total net sales, which surpasses the 2019 third-quarter’s percentage of 49.2 percent.
U.S. wholesale, on the other hand, generated $302.1 million in the quarter, or 34.9 percent of sales, well below the 37.3 percent mark it held in the third quarter last year. Wholesale’s decline was attributed to the cancellation of fall and winter inventory early in the pandemic, and many of the retailer’s partners choosing to run leaner on current inventory.
While wholesale sales declined 14.2 percent year over year, sales of Carter’s exclusive brands through its biggest wholesale partners, Amazon, Walmart and Target, actually improved a combined 10 percent. E-commerce growth from brands through all wholesale customers was up more than 40 percent, with “triple-digit growth rates” with some of the exclusive brands.
International sales, which includes sales in Canada and Mexico as well as wholesale orders in both countries, decreased 10.3 percent from $126.9 million to $113.8 million.
Net Earnings: Net income increased by $21 million, or 34.8 percent, to $81.2 million, or $1.85 per diluted share, compared with $60.3 million, or $1.34 per diluted share, in the third quarter last year.
Adjusted net income increased 2.3 percent, to $85.9 million, compared with $83.9 million in the prior-year period. Adjusted earnings per diluted share increased 4.8 percent year over year to $1.96 from $1.87 last year.
Operating income increased 35.4 percent, to $113.5 million in the third quarter, compared with $83.9 million in the year-ago period. Operating margin increased 420 basis points (4.2 percentage points) to 13.1 percent.
Adjusted operating income increased 4.2 percent, to $119.5 million, compared to $114.7 million. Adjusted operating margin increased 160 basis points (1.6 percentage points) to 13.8 percent, reflecting improved gross margin and strong management of spending.
Gross profit reached $383.7 million in the third quarter, with gross margin representing 44.4 percent of total net sales. The gross margin is an improvement over the company’s $402.2 million gross profit, which was 42.6 percent of sales last year.
CEO’s Take: Casey further elaborated on the store closures, noting that the consumer has responded strongly to the co-branded store model.
“In the past, we’d say, ‘As long as its cash flow breakeven or better, why close them?’ But you have to look at where the arrow is pointing. The performance of the standalone Carter’s and OshKosh stores—we made a decision a year ago to exit those stores,” Casey said. “A lot of times when we’re closing a store it’s because a better center has opened up in an adjacent market. So we’ll open co-branded stores closer to the consumer at better centers with better margins. Our focus is fewer, better, more profitable stores located close to the customer.”