Carter’s, Inc. Reports First Quarter Fiscal 2017 Results

  • Net sales $733 million, growth of 1%
  • Diluted EPS $0.95, decline of 9%; adjusted diluted EPS $0.97,
    decline of 8%
  • Returned $65 million to shareholders through share repurchases and
    dividends
  • Company reaffirms full year fiscal 2017 outlook: net sales growth
    of 4% to 6%; adjusted diluted EPS growth of 8% to 10%

ATLANTA–(BUSINESS WIRE)–Carter’s, Inc. (NYSE:CRI), the largest branded marketer in the United
States and Canada of apparel exclusively for babies and young children,
today reported its first quarter fiscal 2017 results.

We achieved our sales and earnings objectives in the first quarter,”
said Michael D. Casey, Chairman and Chief Executive Officer. “Stronger
than planned demand in our wholesale and eCommerce businesses helped to
offset the effects of delayed tax refunds to families with young
children and a later Easter holiday. We have seen a meaningful
improvement in sales trends in April, driven by Easter holiday shopping,
and expect good growth in sales and earnings in the balance of the year.”

Consolidated Results (First Quarter of Fiscal 2017 compared to First
Quarter of Fiscal 2016)

Net sales increased $8.7 million, or 1.2%, to $732.8 million, reflecting
growth in the Company’s domestic retail and wholesale sales, which was
partially offset by a decline in International sales. Skip Hop, a
global lifestyle brand for families with young children acquired by the
Company in February 2017, contributed $10.4 million to consolidated net
sales in the first quarter of fiscal 2017. Changes in foreign currency
exchange rates in the first quarter of fiscal 2017 compared to the first
quarter of fiscal 2016 favorably affected consolidated net sales in the
first quarter of fiscal 2017 by $1.4 million, or 0.2%. On a constant
currency basis (a non-GAAP measure), consolidated net sales increased
1.0% in the first quarter of fiscal 2017.

Operating income in the first quarter of fiscal 2017 decreased $14.4
million, or 15.5%, to $78.6 million, compared to $93.0 million in the
first quarter of fiscal 2016. Operating margin decreased 210 basis
points to 10.7%, compared to 12.8% in the first quarter of fiscal 2016.
Adjusted operating income (a non-GAAP measure) decreased $13.9 million,
or 14.8%, to $80.1 million, compared to $94.0 million in the first
quarter of fiscal 2016. Adjusted operating margin (a non-GAAP measure)
decreased 210 basis points to 10.9%, compared to 13.0% in the first
quarter of fiscal 2016, which reflected increased investments in retail
operations, marketing, and technology, partially offset by improved
gross profit margin.

Net income in the first quarter of fiscal 2017 decreased $7.3 million,
or 13.6%, to $46.7 million, or $0.95 per diluted share, compared to
$54.0 million, or $1.04 per diluted share, in the first quarter of
fiscal 2016. Adjusted net income (a non-GAAP measure) decreased $7.0
million, or 12.8%, to $47.6 million, compared to $54.6 million in the
first quarter of fiscal 2016. Adjusted earnings per diluted share (a
non-GAAP measure) in the first quarter of fiscal 2017 decreased 7.8% to
$0.97, compared to $1.05 in the first quarter of fiscal 2016.

Cash flow from operations in the first quarter of fiscal 2017 was $84.2
million compared to $128.3 million in the first quarter of fiscal 2016.
The decrease reflected unfavorable changes in net working capital and
lower net income.

See the “Reconciliation of GAAP to Adjusted Results” section of this
release for additional disclosures and reconciliations regarding
non-GAAP measures.

Business Segment Results (First Quarter of Fiscal 2017 compared to
First Quarter of Fiscal 2016)

At the beginning of fiscal 2017, we combined our Carter’s Retail and
OshKosh Retail into a single U.S. Retail operating segment, and our
Carter’s Wholesale and OshKosh Wholesale into a single U.S. Wholesale
operating segment, to reflect the sales-channel approach executive
management now uses to evaluate business performance and manage
operations in the U.S. Our International segment was not affected by
these changes. Our reportable segments are now U.S. Retail, U.S.
Wholesale, and International. Prior periods have been conformed to
reflect our current segment structure.

U.S. Retail Segment

U.S. Retail segment sales increased $9.7 million, or 2.7%, to $363.8
million. U.S. Retail comparable sales decreased 3.5%, comprised of a
stores comparable sales decline of 10.4%, partially offset by eCommerce
comparable sales growth of 19.9%. Skip Hop contributed $0.4 million to
segment net sales in the first quarter of fiscal 2017.

In the first quarter of fiscal 2017, the Company opened 15 stores and
closed five stores in the United States. As of the end of the first
quarter of fiscal 2017, the Company operated 802 retail stores in the
United States, comprised of 622 stand-alone and 180 dual-branded
locations.

U.S. Wholesale Segment

U.S. wholesale segment net sales increased $0.5 million, or 0.2%, to
$292.6 million, reflecting the benefit of the Skip Hop acquisition
offset by a decrease in demand for Carter’s and OshKosh
products. Skip Hop contributed $6.8 million to segment net sales in the
first quarter of fiscal 2017.

International Segment

International segment net sales decreased $1.5 million, or 1.9%, to
$76.4 million, reflecting decreased wholesale demand, partially offset
by growth in retail sales in Canada, increased eCommerce sales in China,
and the benefit of the Skip Hop acquisition. Skip Hop contributed $3.3
million to segment net sales in the first quarter of fiscal 2017.

Changes in foreign currency exchange rates in the first quarter of
fiscal 2017 compared to the first quarter of fiscal 2016 favorably
affected international segment net sales in the first quarter of fiscal
2017 by $1.4 million, or 1.8%. On a constant currency basis (a non-GAAP
measure), international segment net sales declined 3.7%.

For the first quarter of fiscal 2017, Canada retail comparable sales
decreased 8.0%, comprised of a stores comparable sales decline of 11.7%,
partially offset by eCommerce comparable sales growth of 40.1%. In the
first quarter of fiscal 2017, the Company closed one store in Canada. As
of the end of the first quarter of fiscal 2017, the Company operated 163
retail stores in Canada.

Return of Capital

In the first quarter of fiscal 2017, the Company returned a total of
$64.6 million to shareholders through share repurchases and cash
dividends, as described below.

During the first quarter of fiscal 2017, the Company repurchased and
retired 543,944 shares of its common stock for $46.6 million at an
average price of $85.72 per share. Fiscal year-to-date through April 26,
2017, the Company repurchased and retired a total of 694,744 shares for
$60.1 million at an average price of $86.57 per share. All shares were
repurchased in open market transactions pursuant to applicable
regulations for such transactions. As of April 26, 2017, the total
remaining capacity under the Company’s previously announced repurchase
authorizations was approximately $214 million.

During the first quarter of fiscal 2017, the Company paid a cash
dividend of $0.37 per share totaling $18.0 million. Future declarations
of quarterly dividends and the establishment of related record and
payment dates will be at the discretion of the Company’s Board of
Directors based on a number of factors, including the Company’s future
financial performance and other considerations.

2017 Business Outlook

For fiscal 2017, the Company projects net sales to increase
approximately 4% to 6% over fiscal 2016 and adjusted earnings per
diluted share to increase approximately 8% to 10% compared to adjusted
earnings per diluted share of $5.14 in fiscal 2016. This forecast for
fiscal 2017 adjusted earnings per diluted share excludes anticipated
expenses of approximately $3.0 million related to the Skip Hop
acquisition, and approximately $0.5 million related to the Company’s
direct sourcing initiative, which includes severance and relocation
costs.

For the second quarter of fiscal 2017, the Company projects net sales to
increase approximately 6% to 8% compared to the second quarter of fiscal
2016 and adjusted earnings per diluted share to be approximately $0.65
to $0.70 compared to adjusted earnings per diluted share of $0.72 in the
second quarter of fiscal 2016. This projection contemplates net sales
growth in all segments and increased spending to support the Company’s
long-term growth strategies compared to the prior-year period. The
forecast for second quarter fiscal 2017 adjusted earnings per diluted
share excludes anticipated expenses of approximately $1.0 million
related to the Skip Hop acquisition, and approximately $0.2 million
related to the Company’s direct sourcing initiative.

The Company believes non-GAAP measurements, including adjusted earnings
per diluted share, provide investors with a meaningful view of the
Company’s core operating results, and are the same measurements used by
the Company’s executive management to assess the Company’s performance.

Conference Call

The Company will hold a conference call with investors to discuss first
quarter fiscal 2017 results and its business outlook on April 27, 2017
at 8:30 a.m. Eastern Daylight Time. To participate in the call, please
dial 719-457-1506. To listen to a live broadcast via the internet,
please visit www.carters.com
and select the “Q1 2017 Earnings Conference Call” link under the
“Investor Relations” tab. Presentation materials for the call can be
accessed under the same tab by selecting the link for “News & Events”
followed by “Webcasts & Presentations”. A replay of the call will be
available shortly after the broadcast through May 6, 2017, at
888-203-1112 (U.S. / Canada) or 719-457-0820 (international), passcode
5525821. The replay will also be archived on the Company’s website under
the “Investor Relations” tab.

About Carter’s, Inc.

Carter’s, Inc. is the largest branded marketer in the United States and
Canada of apparel and related products exclusively for babies and young
children. The Company owns the Carter’s and OshKosh B’gosh
brands, two of the most recognized brands in the marketplace. These
brands are sold in leading department stores, national chains, and
specialty retailers domestically and internationally. They are also sold
through nearly 1,000 Company-operated stores in the United States and
Canada and on-line at www.carters.com,
www.oshkoshbgosh.com,
and www.cartersoshkosh.ca.
The Company’s Just One You, Precious Firsts, and Genuine
Kids
brands are available at Target, its Child of Mine brand
is available at Walmart, and its Simple Joys brand is available
on Amazon.com. The Company also owns Skip Hop, a global lifestyle
brand for families with young children. Carter’s is headquartered in
Atlanta, Georgia. Additional information may be found at www.carters.com.

Cautionary Language

This press release contains forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 relating to the Company’s future
performance, including, without limitation, statements with respect to
the Company’s anticipated financial results for the second quarter of
fiscal 2017 and fiscal year 2017, or any other future period,
assessments of the Company’s performance and financial position, and
drivers of the Company’s sales and earnings growth. Such statements are
based on current expectations only, and are subject to certain risks,
uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize or not materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated, or projected. Certain of the risks and
uncertainties that could cause actual results and performance to differ
materially are described in the Company’s most recently filed Annual
Report on Form 10-K and other reports filed with the Securities and
Exchange Commission from time to time under the headings “Risk Factors”.
Included among the risks and uncertainties that may impact future
results are the risks of: losing one or more major customers, vendors,
or licensees, due to competition, inadequate quality of the Company’s
products, or otherwise; financial difficulties for one or more of the
Company’s major customers, vendors, or licensees, or an overall decrease
in consumer spending; fluctuations in foreign currency exchange rates;
our products not being accepted in the marketplace, due to quality
concerns, changes in consumer preference and fashion trends, or
otherwise; negative publicity, including as a result of product recalls
or otherwise; failure to protect the Company’s intellectual property;
various types of litigation, including class action litigation brought
under various consumer protection, employment, and privacy and
information security laws; a breach of the Company’s consumer databases,
systems, or processes; the risk of slow-downs, disruptions, or strikes
along the Company’s supply chain, including disruptions resulting from
foreign supply sources, the Company’s distribution centers, or
in-sourcing capabilities; unsuccessful expansion into international
markets or failure to successfully manage legal, regulatory, political
and economic risks of the Company’s existing international operations,
including maintaining compliance with worldwide anti-bribery laws; and
an inability to obtain additional financing on favorable terms. The
Company does not undertake any obligation to publicly update or revise
any forward-looking statements, whether as a result of new information,
future events, or otherwise.

 
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)

     
 
Fiscal Quarter Ended
April 1, 2017     April 2, 2016
Net sales $ 732,755 $ 724,085
Cost of goods sold 416,953   413,156  
Gross profit 315,802 310,929
Selling, general, and administrative expenses 247,794 228,996
Royalty income (10,558 ) (11,075 )
Operating income 78,566 93,008
Interest expense 7,104 6,739
Interest income (139 ) (207 )
Other (income) expense, net (221 ) 3,193  
Income before income taxes 71,822 83,283
Provision for income taxes 25,158   29,303  
Net income $ 46,664   $ 53,980  
 
Basic net income per common share $ 0.96 $ 1.05
Diluted net income per common share $ 0.95 $ 1.04
Dividend declared and paid per common share $ 0.37 $ 0.33
 
 
CARTER’S, INC.
BUSINESS SEGMENT RESULTS

(dollars in thousands)

(unaudited)

     
Fiscal Quarter Ended

April 1,
2017

   

% of
Total Net
Sales

   

April 2,
2016

   

% of
Total Net
Sales

Net sales:

U.S. Wholesale $ 292,555 39.9 % $ 292,054 40.3 %
U.S. Retail (a) 363,771 49.6 % 354,089 48.9 %
International (b) 76,429   10.5 % 77,942   10.8 %
Total net sales $ 732,755   100.0 % $ 724,085   100.0 %
 

Operating income (loss):

% of
Segment
Net Sales

% of
Segment
Net Sales

U.S. Wholesale $ 69,695 23.8 % $ 68,411 23.4 %
U.S. Retail (a) 29,900 8.2 % 39,469 11.1 %
International (b) 3,685 4.8 % 8,441 10.8 %

Corporate expenses (c) (d) (e) (f)

(24,714 ) (23,313 )
Total operating income $ 78,566   10.7 % $ 93,008   12.8 %
 

(a) Includes retail store and eCommerce results.

(b) Net sales includes international retail, eCommerce, and wholesale
sales.

(c) Corporate expenses include expenses related to incentive
compensation, stock-based compensation, executive management, severance
and relocation, finance, building occupancy, information technology,
legal, consulting, and audit fees.

(d) Includes charges related to the amortization of the H.W. Carter and
Sons tradenames of approximately $1.0 million for the fiscal quarter
ended April 2, 2016.

(e) Includes expenses related to the acquisition of Skip Hop of
approximately $1.3 million for the fiscal quarter ended April 1, 2017.

(f) Includes charges related to the Company’s direct sourcing initiative
of $0.2 million for the fiscal quarter ended April 1, 2017.

 
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)

             
 
April 1, 2017 December 31, 2016 April 2, 2016
ASSETS
Current assets:
Cash and cash equivalents $ 154,278 $ 299,358 $ 395,141
Accounts receivable, net 206,707 202,471 192,569
Finished goods inventories 434,712 487,591 376,499
Prepaid expenses and other current assets 46,153 32,180 36,791
Deferred income taxes   35,486   31,841  
Total current assets 841,850 1,057,086 1,032,841

Property, plant, and equipment, net of accumulated depreciation of
$365,733, $345,907, and $307,449, respectively

386,275 385,874 377,273
Tradenames and other intangible assets, net 401,379 308,928 309,853
Goodwill 232,925 176,009 177,238
Other assets 23,034   18,700   15,258  
Total assets $ 1,885,463   $ 1,946,597   $ 1,912,463  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 101,386 $ 158,432 $ 90,387
Other current liabilities 123,661   119,177   102,494  
Total current liabilities 225,047 277,609 192,881
 
Long-term debt, net 581,621 580,376 580,319
Deferred income taxes 133,552 130,656 128,815
Other long-term liabilities 173,280   169,832   161,731  
Total liabilities 1,113,500 1,158,473 1,063,746
 
Commitments and contingencies
 
Stockholders’ equity:
Preferred stock; par value $.01 per share; 100,000 shares
authorized; none issued or outstanding at April 1, 2017, December
31, 2016, and April 2, 2016
Common stock, voting; par value $.01 per share; 150,000,000 shares
authorized; 48,517,417, 48,948,670 and 51,206,395 shares issued and
outstanding at April 1, 2017, December 31, 2016 and April 2, 2016,
respectively
485 489 512
Accumulated other comprehensive loss (33,793 ) (34,740 ) (31,081 )
Retained earnings 805,271   822,375   879,286  
Total stockholders’ equity 771,963   788,124   848,717  
Total liabilities and stockholders’ equity $ 1,885,463   $ 1,946,597   $ 1,912,463  
 
 
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

     
Fiscal Quarter Ended
April 1, 2017     April 2, 2016
Cash flows from operating activities:
Net income $ 46,664 $ 53,980
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 19,513 17,177
Amortization of tradenames 250 995
Amortization of debt issuance costs 373 361
Non-cash stock-based compensation expense 4,779 4,556
Foreign currency (gain) loss, net (62 ) 3,780
Income tax benefit from stock-based compensation (3,144 )
Loss on disposal of property, plant, and equipment 189 192
Deferred income taxes 3,491 2,226
Effect of changes in operating assets and liabilities, net of
acquisition:
Accounts receivable, net 16,247 15,247
Finished goods inventories 82,086 96,056
Prepaid expenses and other assets (15,350 ) (576 )
Accounts payable and other liabilities (74,000 ) (62,568 )
Net cash provided by operating activities 84,180   128,282  
 
Cash flows from investing activities:
Capital expenditures (17,991 ) (25,552 )
Acquisition of Skip Hop Holdings, Inc., net of cash acquired (143,704 )  
Net cash used in investing activities (161,695 ) (25,552 )
 
Cash flows from financing activities:
Borrowing under secured revolving credit facility 20,000
Payment on secured revolving credit facility (18,965 )
Repurchases of common stock (46,627 ) (71,561 )
Dividends paid (17,998 ) (17,032 )
Income tax benefit from stock-based compensation 3,144

Withholdings from vestings of restricted stock

(5,552 ) (8,454 )

Proceeds from exercises of stock options

1,626   3,747  
Net cash used in financing activities (67,516 ) (90,156 )
 
Effect of exchange rate changes on cash and cash equivalents (49 ) 1,358  
Net (decrease) increase in cash and cash equivalents (145,080 ) 13,932
Cash and cash equivalents, beginning of period 299,358   381,209  
Cash and cash equivalents, end of period $ 154,278   $ 395,141  
 
 

CARTER’S, INC.

RECONCILIATION OF GAAP TO ADJUSTED RESULTS

(dollars in millions, except earnings per share)

(unaudited)

                                 
 
Fiscal Quarter Ended April 1, 2017

Gross
Margin

% Net
Sales

SG&A

% Net
Sales

Operating
Income

% Net
Sales

Net
Income

Diluted
EPS

As reported (GAAP) $ 315.8 43.1 % $ 247.8 33.8 % $ 78.6 10.7 % $ 46.7 $ 0.95
Acquisition-related costs (b) (c) (1.3 ) 1.3 0.8 0.02
Direct sourcing initiative (b) (d)   (0.2 ) 0.2   0.2  
As adjusted (a) $ 315.8   43.1 % $ 246.3   33.6 % $ 80.1   10.9 % $ 47.6   $ 0.97
 
 
Fiscal Quarter Ended April 2, 2016

Gross
Margin

% Net
Sales

SG&A

% Net
Sales

Operating
Income

% Net
Sales

Net
Income

Diluted
EPS

As reported (GAAP) $ 310.9 42.9 % $ 229.0 31.6 % $ 93.0 12.8 % $ 54.0 $ 1.04
Amortization of tradenames (b)   (1.0 ) 1.0   0.6   0.01
As adjusted (a) $ 310.9   42.9 % $ 228.0   31.5 % $ 94.0   13.0 % $ 54.6   $ 1.05
 

(a) In addition to the results provided in this earnings release in
accordance with GAAP, the Company has provided adjusted, non-GAAP
financial measurements that present SG&A, operating income, net income,
and net income on a diluted share basis excluding the adjustments
discussed above. The Company believes these adjustments provide a
meaningful comparison of the Company’s results and affords investors a
view of what management considers to be the Company’s core performance.
The adjusted, non-GAAP financial measurements included in this earnings
release should not be considered as an alternative to net income or as
any other measurement of performance derived in accordance with GAAP.
The adjusted, non-GAAP financial measurements are presented for
informational purposes only and are not necessarily indicative of the
Company’s future condition or results of operations.

(b) The difference between the impacts on Operating Income and Net
Income represents the income taxes related to the adjustment item
(calculated using the applicable tax rate of the underlying
jurisdiction).

(c) Transaction costs associated with the Skip Hop acquisition.

(d) Costs associated with the Company’s direct sourcing initiative,
which includes severance and relocation.

Note: Results may not be additive due to rounding.

 
CARTER’S, INC.
RECONCILIATION OF GAAP TO ADJUSTED RESULTS

(dollars in millions, except earnings per share)

(unaudited)

                     
 
Fiscal Quarter Ended July 2, 2016

Gross
Margin

SG&A

Operating
Income

Net Income Diluted EPS
As reported (GAAP) $ 282.2 $ 228.5 $ 63.2 $ 36.2 $ 0.71
Amortization of tradenames (b)   (0.8 ) 0.8   0.5   0.01
As adjusted (a) $ 282.2   $ 227.7   $ 64.0   $ 36.7   $ 0.72
 
 
Fiscal Year Ended December 31, 2016

Gross
Margin

SG&A

Operating
Income

Net Income Diluted EPS
As reported (GAAP) $ 1,379.1 $ 995.4 $ 426.6 $ 258.1 $ 5.08
Amortization of tradenames (b) (1.7 ) 1.7 1.1 0.02
Direct sourcing initiative (b) (c) (0.7 ) 0.7 0.5 0.01
Acquisition-related costs (b) (d)   (2.4 ) 2.4   1.5   0.03
As adjusted (a) $ 1,379.1   $ 990.6   $ 431.4   $ 261.1   $ 5.14
 

(a) In addition to the results provided in this earnings release in
accordance with GAAP, the Company has provided adjusted, non-GAAP
financial measurements that present SG&A, operating income, net income,
and net income on a diluted share basis excluding the adjustments
discussed above. The Company believes these adjustments provide a
meaningful comparison of the Company’s results and affords investors a
view of what management considers to be the Company’s core performance.
The adjusted, non-GAAP financial measurements included in this earnings
release should not be considered as an alternative to net income or as
any other measurement of performance derived in accordance with GAAP.

Contacts

Carter’s, Inc.
Sean McHugh, 678-791-7615
Vice President &
Treasurer

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