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Carter’s Net Sales Drop Nearly 30%, But Remains Profitable Despite COVID-19

Carter’s saw net sales decrease nearly 30 percent to $514.9 million in the second quarter, with the declines driven by the closure of the retailer’s 1,100 stores during April and May. But both total revenue and adjusted earnings, which came in at 54 cents per share, outperformed Wall Street expectations, which called for sales of $506.1 million and a 25 cent per share adjusted net loss.

As of the end of the second quarter, approximately 97 percent of the company’s stores in the U.S. and 90 percent in Canada have reopened.

In a Nutshell: Carter’s, which has packed and held $110 million worth of unshipped spring and summer inventory for next year, saw net inventories drop 4 percent in the quarter from $698 million to $672 million, with the retailer anticipating net inventories to continue declining in the second half of the year.

Given the market disruption caused by the COVID-19 pandemic, recent spikes in confirmed coronavirus cases, and related uncertainty on timing and extent of the market recovery, Carter’s is not providing fiscal 2020 sales and earnings guidance. However, the company did say that it expects COVID-19 to have a material impact on its second-half net sales and profitability.

The company’s total liquidity at the end of the second quarter was $1.5 billion, comprised of cash and cash equivalents of $1.0 billion and $501 million in unused borrowing capacity on the its $750 million secured revolving credit facility.

Carter’s believes it has “sufficient liquidity for the foreseeable future” to maintain its operations and manage through the disruption caused by the coronavirus emergency.

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Consistent with the company’s previously announced temporary suspensions of share repurchases and quarterly cash dividends, no distributions of capital occurred in the quarter. The company’s board of directors will evaluate future distributions of capital, including share repurchases and dividends, based on a number of factors, including business conditions, the company’s financial performance and other considerations.

Net Sales: Net sales decreased $219.5 million, or 29.9 percent, to $514.9 million in the second quarter. The decline was driven by the closure of the company’s retail stores in the quarter, particularly during the months of April and May, and decreased sales to certain wholesale customers as a result of disruptions related to COVID-19.

Since Carter’s started reopening its stores, second-quarter comparable sales increased 8 percent.

In the quarter, U.S. retail sales dipped 25 percent from $423 million to $316 million, while wholesale revenue suffered a bigger hit with a 34 percent decline from $229 million to $152 million.

Comparable e-commerce sales in the U.S. and Canada grew 101 percent and 194 percent, respectively, boosted by omnichannel sales channels including buy online, ship to store; buy online, pickup in store; curbside pickup; and fulfill from store.

International sales, which includes sales in Canada and Mexico as well as wholesale orders in both countries, decreased 43 percent from $82 million to $47 million.

Net Earnings: Net income was $8.2 million, or 19 cents per diluted share, compared to $43.9 million, or 97 cents per diluted share, in the second quarter of fiscal 2019. Adjusted net income was $23.6 million, compared to $43.4 million in the second quarter of fiscal 2019. Adjusted earnings per diluted share was 54 cents, compared to 95 cents in in the year-ago period.

Operating income was $21 million in the second quarter, compared to $64.5 million last year. Adjusted operating income, which includes $13 million in COVID-19 expenses, as well as $7 million in store leases, organizational restructuring costs and store restructuring costs, was $41.1 million, compared to $63.8 million in the second quarter of fiscal 2019.

The decrease reflects the decline in net sales and lower royalty income, partially offset by improved gross margin and lower selling, general, and administrative expenses.

Gross profit decreased 27 percent from $323 million in last year’s second quarter to $236 million, but its percentage of total sales increased from 44 percent to 45.7 percent of total sales.

CEO’s Take: “We had a strong finish to the second quarter. Thankfully, the disruption to our business due to the pandemic and related store closures was less meaningful than we expected,” said Michael D. Casey, Carter’s chairman and CEO. “In the second quarter, we continued to see good demand from our largest wholesale customers whose stores remained open, and we were also able to serve the needs of families with young children through our very profitable e-commerce operations. By the end of June, substantially all of our stores in the United States had reopened and we saw strong demand for our brands over the July 4th holiday shopping period.

“In the second quarter, we strengthened our brand marketing, improved price realization with more effective promotions, controlled spending, reduced our exposure to excess inventories and improved liquidity,” he added. “We are now entering the largest portion of our year with respect to sales and earnings contribution. Given the strength of our brands and extensive market presence, we believe we are well-positioned to weather the current market challenges. We expect gradually improving trends in the performance of our company, relative to the second quarter, in the balance of the year.”