Carter’s had a tough second quarter as sales decreased 6.1 percent to $700.7 million on net income of $37 million, missing Wall Street forecasts as the company says it struggled to keep up with last year’s stimulus-supported spending.
In a Nutshell: Due to the performance and ongoing headwinds including gas prices and inflation, Carter’s downgraded its full-year outlook for 2022.
The baby and children’s apparel retailer is anticipating net sales of approximately $3.25 billion to $3.30 billion; which would be a 7.7 percent to 5.5 percent reduction from last year’s $3.48 billion. The company initially projected 2 percent to 3 percent sales growth.
The company also expects adjusted operating income of approximately $415 million to $440 million, compared to $500.8 million in fiscal 2021, after initially anticipating a 4 percent to 6 percent increase. Adjusted diluted earnings per share was expected to range within approximately $7.10 to $7.60, compared to $7.87 in fiscal 2021. Carter’s initially projected approximately 12 percent to 14 percent growth.
Carter’s released its third-quarter guidance, calling for net sales of approximately $850 million to $865 million, which would range from a 4.6 percent decrease to a 2.9 percent decrease from last year’s $890.6 million.
The retailer expects adjusted operating income of approximately $90 million to $100 million, down from $123.9 million in the third quarter of fiscal 2021; and adjusted diluted earnings per share of approximately $1.50 to $1.70, compared to $1.93 in year-ago period.
Comparable retail sales in April were down 1 percent, before sales further weakened in May and June, Carter’s chairman and CEO Michael Casey told Wall Street analysts in a conference call.
On-time deliveries have improved but aren’t back to pre-pandemic levels, he said, indicating that fall deliveries are expected to be about 80 percent on time. These will run “a few weeks behind” on average, which is the best performance the retailer has seen since the pandemic began, according to Casey. In a good year, he said on-time delivery runs as high as 95 percent.
“A year ago, we were only shipping 50 percent on-time due to the supply chain delays both in factories and due to port congestion,” Casey said. “We have routed over 60 percent of our shipments from Asia to the East Coast this year to mitigate the risk of prolonged delays and labor disputes on the West Coast. The East Coast continues to be our preferred entry point given the closer proximity to our Georgia-based distribution centers.”
The lockdowns in China have not had a material impact on the timing of production or shipments, the CEO said, noting that Carter’s is encouraged by recent meetings with its largest suppliers in Asia.
According to Casey, suppliers suggest that capacity is opening up in Asia as global demand is weighed down by inflation. Input costs are trending lower, containers are available to get products on the way to the U.S. and ocean freight rates have trended lower every month over the past six months, he said.
The suppliers’ views are consistent with Carter’s data, with Casey citing that cotton prices and ocean freight rates are each down over 30 percent from recent highs. With that in mind, these improving trends could enable more stable product costs for Carter’s beginning in the second half of 2023.
“We’re expecting that the impact of the higher ocean freight rates will moderate a bit in the second half,” Richard Westenberger, executive vice president and chief financial officer of Carter’s, said in the call. “It was in the latter half of last year when we saw rates really begin to spike. We were also spending heavily on air freight to expedited delayed product in the second half of last year, which we do not plan to repeat this year.”
Inventories soared 38.5 percent to $858.2 million at the end of the second quarter, up from $619.6 million last year.
Inventories will be elevated this year for two primary reasons, according to Casey. He said the retailer ordered product earlier to improve on-time deliveries for the back-to-school and holiday seasons, and that the company is packing and holding inventory, given the slowdown in demand in recent months.
After packing and holding $100 million in inventory in 2020, and doing the same to a lesser extent in 2021, the company is reprising the strategy this year. Pack-and-hold inventory will largely consist of fall and winter product previously earmarked for Carter’s stores, website and some wholesale customers. Westenberg said the 2020 inventory has now been “fully sold through at good margins.”
“We have the wherewithal to hold this inventory and give ourselves the opportunity to earn a good return on this investment, versus simply liquidating it at whatever price possible,” Westenberg said. Carter’s forecasts that the inventory growth is expected to moderate in the back half, at 20 percent above last year’s levels in the third quarter and then 15 percent in the fourth quarter.
Gross margin at Carter’s was 47.3 percent, down 210 basis points (2.1 percentage points) from the year-ago quarter’s 49.4 percent. The decline was due to lower sales, $14 million in inventory provisions in the second quarter and the elevated freight rates compared to 2021.
Westenberger said the retailer is planning year-over-year gross margin expansion in the back half of 2021, given the anticipated decrease in transportation costs, continued progress in price realization and improved mix of high-margin retail sales in the fourth quarter.
Cash and cash equivalents totaled $231.3 million, while total liquidity was $957 million, with the majority of the company’s $850 million revolving credit facility still available.
Net sales: Net sales at Carter’s decreased 6.1 percent, to $700.7 million, down from $764.4 million in the year-ago quarter, driven by declines in the company’s U.S. retail and U.S. wholesale sales, partially offset by growth in its international sales.
Changes in foreign currency exchange rates used for translation in the second quarter of fiscal 2022, as compared to the second quarter of fiscal 2021, had an unfavorable effect on consolidated net sales of approximately $2.3 million, or 0.3 percent.
U.S. retail and U.S. wholesale net sales declined by 11 percent and 3 percent, respectively. U.S. retail, which represents 54.1 percent of net sales, declined to $379.1 million from $423.6 million. The U.S. wholesale department, representing 32 percent of Carter’s sales, dipped to $224 million from $231.6 million in the 2021 second quarter.
U.S. retail comparable net sales declined 8 percent.
International net sales grew 7 percent to $97.6 million from $91.1 million in the year-ago period, and now comprises 13.9 percent of total sales.
Net Earnings: Net income was $37 million, or 93 cents per diluted share, compared to $71.6 million, or $1.62 per diluted share, in the second quarter of fiscal 2021. Adjusted net income was $52.1 million, compared to $73.7 million in the second quarter of fiscal 2021. Adjusted earnings per diluted share was $1.30, compared to $1.67 in the prior-year quarter.
Operating income was $75.4 million, compared to $107.6 million in the 2021 second. Adjusted operating income dipped to $75.4 million, from $110.4 million in the year-ago quarter.
CEO’s Take: “A year ago, 50 percent of our fall and holiday product offerings arrived late,” Casey said of why Carter’s is so focused on ordering product earlier for the upcoming shopping seasons. “Last year some of our product offerings arrived incomplete. We had ordered beautiful matching outfits and many did not match. Many tops arrived without bottoms, and bottoms arrived without the matching tops. Some product offerings arrived so late we missed the selling window and some other product offerings never arrived at all. By bringing product in earlier this year. we plan to provide a much better experience for consumers in the second half, which may drive higher sales than forecasted.”