Carter’s saw net sales dip 0.8 percent in the first quarter to $781.3 million as growth in the retailer’s wholesale and international segments was offset by a decline in U.S. retail sales. Net income came in at $67.9 million, or $1.66 per diluted share.
In a Nutshell: The children’s apparel retailer identified three major reasons for the U.S. sales decline. For one, the first quarter of 2021 saw significant benefits from government stimulus-related spending. The company also operated 113 fewer retail stores at the beginning of the quarter, and Easter took place later in 2022.
Despite the decline, Carter’s CEO and chairman Michael D. Casey said the quarter turned out better than expected, and remained bullish on the remainder of the year due to an improving trend in births in the U.S. and Mexico. Casey reiterated the retailer’s plans to open 100 net new U.S. stores over the next five years, with plans to open 30 stores and close 20 locations in 2022. These stores are co-branded locations with sister brand OshKosh B’gosh.
“Our focus is on high-traffic open-air centers that provide convenience for online shoppers including curbside pickup,” Casey said. “Stores planned for closure had a low-single-digit operating margin last year. Stores we plan to open are forecasted to earn more than a 20 percent operating margin.”
On the supply chain front, Casey said on-time deliveries to wholesale customers improved in the first quarter, with Carter’s now routing more than 60 percent of imports through the East Coast, where “ports are less congested than the West Coast and processing receipts quicker for us.”
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To mitigate the risk of further delays, the retailer has placed factory orders three-to-six weeks earlier in 2022.
As late deliveries and inflation weigh on growth, Carter’s is paying the price: Casey estimated that product costs were up about 7 percent this year, while freight costs were up more than 10 percent.
“We have ocean freight rates contracts for about 90 percent of our unit volume through the first half of next year. The rates under those contracts are less than half the current spot market rates,” Casey said. “Lower spending on air freight planned this year and next will help mitigate the higher ocean freight rates.”
In line with the elevated costs, average price points are planned to be less than $11 per unit this year, up less than 80 cents per unit.
“It’s a very affordable purchase and a great value given the beauty, quality, and use of our product offerings,” Casey said, adding, “to date, we’ve seen no noteworthy resistance to pricing from our wholesale customers or consumers.”
Inventories of finished goods increased 21.2 percent to $679.7 million from $560.7 million, driven by higher in-transit inventory and planned earlier receipts, which enabled the retailer to support higher demand from its wholesale customers.
Wholesale at Carter’s has remained a success with key accounts including Walmart, Amazon, Target, Kohl’s and Buybuy Baby and sales increasing 8.4 percent in the channel. Carter’s projects growth with five of its top six wholesale customers this year.
Gross margin was 45.4 percent in the quarter, down 440 basis points (4.4 percentage points) from last year’s 49.8 percent margin.
Cash and cash equivalents as of April 2 total $702.3 million, with the retailer having approximately $1.4 billion in total liquidity. The company still has total long-term debt of $496 million, down from the $990 million in debt it had at the end of the 2021 first quarter. Carter’s is forecasting operating cash flow to fall between $275 million and $300 million in fiscal 2022.
For the second quarter of fiscal 2022, Carter’s projects net sales of approximately $750 million to $775 million for a 0.5 percent to 3.8 percent increase from last year’s $746.4 million.
Additionally, the retailer expects adjusted operating income of approximately $95 million to $105 million, compared to $110.4 million in the second quarter of fiscal 2021.
In the quarter, Carter’s also anticipates adjusted diluted earnings per share of approximately $1.60 to $1.80 (which excludes a $20 million estimated loss on a debt repayment), compared to $1.67 in the second quarter of fiscal 2021.
The outlook factors in continued improvement in supply chain performance, less challenging comparisons to the 2021 stimulus, improved price realization, as well as higher labor costs, marketing investments and distribution and freight expenses.
For fiscal 2022, the company is reaffirming its prior guidance of a 2 percent to 3 percent increase in net sales and adjusted operating income increase of approximately 4 percent to 6 percent, up from $500.8 million in fiscal 2021. Adjusted diluted earnings per share are expected to increase approximately 12 percent to 14 percent (excluding the debt repayment), compared to $7.87 in fiscal 2021.
Net Sales: First-quarter net sales at Carter’s decreased 0.8 percent to $781.3 million from $787.4 million in the year-ago period.
U.S. retail sales declined 10 percent to $366.4 million in the first quarter, down from $407.1 million in the year-ago period. U.S. retail comparable sales declined 7 percent.
U.S. wholesale sales increased 8.4 percent to $307.3 million from the 2021 first quarter’s $283.4 million.
International sales in the quarter jumped 11 percent to $107.6 million, up from last year’s $96.9 million. By country, Canada saw an 18 percent jump in sales, while Mexico sales increased 5 percent. Sales in Brazil soared 65 percent.
Net Earnings: Net income came in at $67.9 million, or $1.66 per diluted share, compared to $86.2 million, or $1.96 per diluted share, in the first quarter of fiscal 2021. Adjusted net income was the same figure at $67.9 million, compared to $87 million in last year’s first quarter. Adjusted earnings per diluted share was $1.66, compared to $1.98 in the first quarter of fiscal 2021.
Operating income in the first quarter was $102.6 million, down from the year prior’s $127.5 million. Operating margin decreased to 13.1 percent, compared to 16.2 percent in the 2021 quarter, largely due to higher ocean freight and transportation costs.
CEO’s Take: “We have not been materially affected by China’s recent Covid restrictions,” Casey said. “We source less than 10 percent of our total unit volume from China. Our suppliers source a large portion of our fabric and other component parts from the southern regions of China, far from the major cities being locked down further north. Shanghai ports have remained open but are congested. Alternative ports are being used to mitigate congestion related delays.”