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Carter’s Posts Q1 Sales Surprise as Profits Swing Back to Black

The federal government’s $1.9 trillion Covid-19 relief package gave Carter’s a significant first-quarter boost, powering a 20 percent sales spike.

In a Nutshell: While first quarter fiscal 2020 sales were adversely impacted by the start of the pandemic, which saw state and local governments mandate temporary store closures to curb the rise in infection rates, that wasn’t the case in the comparable quarter that ended April 3.

Rather, Carter’s achieved a record gross margin in the first quarter of 49.8 percent, as well as its best quarterly operating margin, 16.2 percent, in a decade, according to Richard Westenberger, executive vice president and chief financial officer.

CEO and chairman Michael Casey said the first quarter got off to a good start in January, but that the pace really picked up in March when demand reached its highest level for that month in five years. “Our second quarter sales are also off to a good start as warmer weather continues to arrive in more parts of the country and consumers are more comfortable getting out to shop,” Casey said.

“In addition to our strong product offerings, we believe our growth was spurred by a number of other factors, including warmer weather in the weeks leading up to Easter, the benefit of government stimulus, the easing of Covid-related restrictions, the progress of vaccinations around the country and the return of in-person learning,” Westenberger said Friday in a call with Wall Street analysts.

Casey also noted the stimulus package will continue to benefit families with children, providing as much as $300 a month for children under the age of 6 starting in July and as much as $8,000 in tax credits for child care next year.

“As we move through the balance of the year, it will be interesting to see the impact of the stimulus package, which supports families with young children,” Casey said.

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Supply chain delays from Asia continued to impact Carter’s business in the first quarter, Casey said. “It’s a macro challenge affecting many retailers,” he noted. Compared to the fourth quarter, timing has not yet improved as two- to three-week delays persist.

Whereas production delays had previously been linked to transportation issues, Westenberger added, Carter’s has seen factory delays in recent weeks due to coronavirus infections.

“Infections from the coronavirus are outpacing [suppliers’] employees’ access to the vaccine,” Casey said. “As a result, we expect late deliveries may continue at the balance of the year.”

Though Carter’s has absorbed this risk into its forecasts, Casey said it is also taking steps to mitigate its exposure to delays, including by expediting its supply chain at a higher cost and by moving up production schedules.

Meanwhile, Westenberger said Carter’s has made good progress on reducing excess inventory this past year. Net inventory totaled $561 million at the end of the first quarter, down 1 percent from the prior year. Given the supply chain disruptions Carter’s has seen, Westenberg said the company is now looking to increase inventory.

Casey also noted that the babies and children’s apparel firm saw record gross profit margin and its best operating profit margin in over a decade, reflecting more effective promotions, inventory management, improved price realization and productivity.

Carter’s said it ended the quarter with $1.8 billion in liquidity, comprised of cash and cash equivalents of $1.05 billion and $745 million in available borrowing capacity on its secured revolving credit facility.

Net Sales: Net sales for the three months jumped 20 percent to $787.4 million from $654.5 million.

Carter’s said its U.S. retail, U.S. wholesale and international segments rose by 27 percent, 12 percent and 19 percent, respectively.

Operating income rose $206.0 million to $127.5 million, versus an operating loss of $78.5 million in the same comparable period a year ago. And operating margin improved to 16.2 percent, versus down 12 percent a year ago. Gross profit margin—revenue minus the cost of goods sold, divided by revenue—for the quarter was 49 percent.

CL King & Assocs. analyst Steven L. Marotta described Carter’s first quarter results as a “blowout,” given that the 20 percent spike in sales and the gain in adjusted diluted earnings per share were both higher than Wall Street’s consensus.

“We view the Q1 results with a strong positive bias. What was only recently expected to be a transition year (at best) is now turning out to be the mother (pun intended) of all rebounds,” Marotta wrote in a research note shortly after the company reported results Friday morning.

Earnings: Net income for the quarter was $86.2 million, or $1.96 a diluted share, from a net loss of $78.7 million, or $1.82, in the year-ago period. On an adjusted basis, net income was $87.0 million, or $1.98 a diluted share, versus last year’s adjusted loss of $34.8 million, or 81 cents.

Wall Street analysts were expecting 28 cents a diluted share on revenue of $664.5 million.

Carter’s said there were still a hose of marketplace risks, which include: supply chain disruptions, higher transportation costs, pandemic-related birth count declines, Covid-19 case trends, store traffic and product cost inflation, among other factors. The risks could be offset in part by less restrictive business and social gathering directives, a return to in-person classroom instruction and additional government stimulus, to name a few possible scenarios.

Other factors cited by the company that could impact second half comparisons to the same comparable period in 2020 include a change in the timing of wholesale shipments, retail store closures, and last year’s release of inventory reserves and a 53-week fiscal year.

Balancing out all the risks, the company projected net sales in 2021 to increase 10 percent, on a forecasted 40 percent gain in adjusted diluted earnings per share to about $5.82. The 2020 adjusted diluted EPS was $4.16. Carter’s cautioned that the guidance excludes $7 million of expenses related to the Covid-19 pandemic, such as additional personal protective equipment (PPE) and cleaning supplies, and $1 million in restructuring costs.

For the second quarter, the company guidance net sales to increase 35 percent, and for adjusted diluted EPS to increase 25 percent to 68 cents. The year-ago adjusted diluted EPS was 54 cents for the quarter. The forecast also excludes $2 million in expenses for PPE and cleaning supplies.

CEO’s Take: “I think it’s going to be a buyer’s market when the dust settles on this pandemic,” Casey said. “So whereas we’ve hit the pause button on store openings, we make a lot of money in our stores. We see a very high return on investment in our stores. And whereas we’re closing about 25 percent of our pre-pandemic store portfolio, I think there’s going to be new opportunities to open up co-branded stores, highly productive stores, located closer to consumers, that provide a high service level to our online consumers.”