December 15th, 2015

Carter’s, Inc. Reports Third Quarter Fiscal 2020 Results

Carter’s, Inc. (NYSE:CRI), the largest branded marketer in North America of apparel exclusively for babies and young children, today reported its third quarter fiscal 2020 results.

“We exceeded our sales and earnings goals in the third quarter,” said Michael D. Casey, Chairman and Chief Executive Officer. “The quarter got off to a strong start with our Fourth of July holiday retail sales up 7%. We saw less robust demand in August during the back-to-school shopping period with many children beginning their school year at home and learning virtually. We had the strongest level of demand in September with our Labor Day holiday retail sales up 15%, our best performance in three years.

“Earnings in the quarter were driven by the strength of our product offerings, more effective brand marketing, fewer promotions, curtailed spending and growth in eCommerce sales. eCommerce continues to be our fastest growing and highest margin business.

“We believe our third quarter performance reflects the strength of our brands, our strong value proposition, broad market distribution and the less discretionary nature of children’s apparel.

“As we enter the final weeks of the year, consumer demand is less predictable this holiday season given the lingering effects and, in some markets, resurgence of the coronavirus. That said, we believe we are well-positioned to outperform the market in the balance of 2020 and years ahead by providing the best value and experience in young children’s apparel.”

Adjustments to Reported GAAP Results

In addition to the results presented in this earnings release in accordance with GAAP, the Company has provided adjusted, non-GAAP financial measurements, as presented below. The Company believes these adjustments provide a meaningful comparison of the Company’s results and afford investors a view of what management considers to be the Company's core performance. These measures are presented for informational purposes only. See “Reconciliation of GAAP to Adjusted Results” section of this release for additional disclosures and reconciliations regarding these non-GAAP financial measures.

Third Fiscal Quarter

2020

2019

(In millions, except earnings per share)

Operating
Income

% Net
Sales

Net
Income

Diluted
EPS

Operating
Income

% Net
Sales

Net
Income

Diluted
EPS

As reported (GAAP)

$

113.5

13.1

%

$

81.2

$

1.85

$

83.9

8.9

%

$

60.3

$

1.34

COVID-19 expenses

3.3

2.5

0.06

Retail store operating leases and other long-lived asset impairments, net

1.5

1.1

0.03

Productivity/restructuring costs

1.2

1.0

0.02

Intangible asset impairment

30.8

23.7

0.53

As adjusted

$

119.5

13.8

%

$

85.9

$

1.96

$

114.7

12.2

%

$

83.9

$

1.87

First Three Fiscal Quarters

2020

2019

(In millions, except earnings per share)

Operating
Income

% Net
Sales

Net
Income

Diluted
EPS

Operating
Income

% Net
Sales

Net
Income

Diluted
EPS

As reported (GAAP)

$

56.0

2.8

%

$

10.7

$

0.24

$

209.1

8.6

%

$

138.7

$

3.06

Intangible asset impairment

26.5

20.2

0.46

30.8

23.7

0.52

Goodwill impairment

17.7

17.7

0.40

COVID-19 expenses

18.8

14.3

0.34

Productivity/restructuring costs

8.8

6.8

0.15

1.6

1.3

0.03

Retail store operating leases and other long-lived asset impairments, net

6.5

4.9

0.11

Debt extinguishment loss

6.0

0.13

Store restructuring costs

(0.7

)

(0.6

)

(0.01

)

China business model change

(2.1

)

(2.1

)

(0.05

)

As adjusted

$

134.3

6.6

%

$

74.7

$

1.70

$

238.7

9.9

%

$

166.9

$

3.68

 

Note: Results may not be additive due to rounding.

Consolidated Results

The discussion of results below is presented on an adjusted (non-GAAP) basis where noted.

Third Quarter of Fiscal 2020 compared to Third Quarter of Fiscal 2019

Net sales decreased $78.2 million, or 8.3%, to $865.1 million, compared to $943.3 million in the third quarter of fiscal 2019. The decline reflects decreased sales to certain wholesale customers, decreased traffic to Company-operated stores, and decreased back-to-school sales (all a result of ongoing disruptions related to the COVID-19 pandemic), partially offset by strong eCommerce channel growth. U.S. Retail segment comparable sales declined 3.5%, reflecting a retail store decline, partially offset by eCommerce growth of 17.2%.

Operating income increased $29.7 million, or 35.4%, to $113.5 million, compared to $83.9 million in the third quarter of fiscal 2019. Operating margin increased 420 basis points to 13.1%. Adjusted operating income (a non-GAAP measure) increased $4.9 million, or 4.2%, to $119.5 million, compared to $114.7 million in the third quarter of fiscal 2019. Adjusted operating margin increased 160 basis points to 13.8%, reflecting improved gross margin and strong management of spending.

Net income increased $21.0 million, or 34.8%, to $81.2 million, or $1.85 per diluted share, compared to $60.3 million, or $1.34 per diluted share, in the third quarter of fiscal 2019. Adjusted net income (a non-GAAP measure) increased $2.0 million, or 2.3%, to $85.9 million, compared to $83.9 million in the third quarter of fiscal 2019. Adjusted earnings per diluted share (a non-GAAP measure) increased 4.8% to $1.96, compared to $1.87 in the third quarter of fiscal 2019.

First Three Quarters of Fiscal 2020 compared to First Three Quarters of Fiscal 2019

Net sales decreased $384.3 million, or 15.9%, to $2.03 billion. This decrease reflects the temporary closure of the Company’s retail stores earlier this year, largely in the months of March, April, and May, and decreased sales to certain wholesale customers (both a result of disruptions related to COVID-19), partially offset by strong growth in eCommerce sales. Comparable eCommerce sales in the U.S. increased 39%.

Operating income was $56.0 million, compared to $209.1 million in the first three quarters of fiscal 2019. Adjusted operating income (a non-GAAP measure) was $134.3 million, compared to $238.7 million in the first three quarters of fiscal 2019. The decrease reflects the decline in net sales, increased inventory provisions, and lower royalty income, partially offset by decreased selling, general, and administrative expenses.

Net income was $10.7 million, or $0.24 per diluted share, compared to $138.7 million, or $3.06 per diluted share, in the first three quarters of fiscal 2019. Adjusted net income (a non-GAAP measure) was $74.7 million, compared to $166.9 million in the first three quarters of fiscal 2019. Adjusted earnings per diluted share (a non-GAAP measure) was $1.70, compared to $3.68 in the first three quarters of fiscal 2019.

Net cash provided by operations in the first three quarters of fiscal 2020 was $320.1 million compared to $73.4 million in the first three quarters of fiscal 2019. The increase reflects the extension of vendor payment terms, deferrals of retail store lease and other cash payments, and a reduction in inventory, partially offset by lower earnings related to COVID-19 disruptions.

See the “Business Segment Results” and “Reconciliation of GAAP to Adjusted Results” sections of this release for additional disclosures regarding business segment performance and non-GAAP measures.

Liquidity and Financial Position

During the third quarter of fiscal 2020, the Company repaid $244 million in outstanding borrowings under its $750 million secured revolving credit facility using cash on hand. The Company’s total liquidity at the end of the third quarter of fiscal 2020 was $1.6 billion, comprised of cash and cash equivalents of $831 million and approximately $740 million in available borrowing capacity (exclusive of $7 million of outstanding letters of credit) on its secured revolving credit facility.

Earlier this year, the Company announced that, in connection with the COVID-19 pandemic, it temporarily suspended its common stock share repurchase program and quarterly cash dividend. No distributions of capital occurred in the third quarter of fiscal 2020. Provisions in the Company’s secured revolving credit facility restrict the Company’s ability to pay cash dividends or repurchase its common stock through the third fiscal quarter of 2021, and could have the effect of restricting the Company’s ability to do so thereafter. The Company’s Board of Directors will evaluate future distributions of capital, including share repurchases and dividends, based on a number of factors, including restrictions under the Company’s revolving credit facility, business conditions, the Company’s financial performance, and other considerations.

The Company continues to believe it has sufficient liquidity for the foreseeable future to maintain its operations and manage through the disruption caused by the COVID-19 pandemic.

2020 Business Outlook

Given the market disruption caused by the COVID-19 pandemic, recent spikes in confirmed cases of the coronavirus, and related uncertainty on timing and extent of the market recovery, the Company is not providing fiscal 2020 sales and earnings guidance at this time.

Conference Call

The Company will hold a conference call with investors to discuss third quarter fiscal 2020 results and its business outlook on October 23, 2020 at 8:30 a.m. Eastern Daylight Time. To participate in the call, please dial 334-777-6978. To listen to a live broadcast via the internet and view the accompanying presentation materials, please visit ir.carters.com and select links for “News & Events” followed by “Webcasts & Presentations”. A replay of the call will be available shortly after the broadcast through November 6, 2020, at 888-203-1112 (U.S. / Canada) or 719-457-0820 (international), passcode 9393867. The replay will also be archived online on the “Webcasts & Presentations” page noted above.

About Carter’s, Inc.

Carter’s, Inc. is the largest branded marketer in North America of apparel 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 approximately 1,100 Company-operated stores in the United States, Canada, and Mexico and online at www.carters.com, www.oshkosh.com, www.cartersoshkosh.ca, and www.carters.com.mx. The Company’s Child of Mine brand is available at Walmart, its Just One You brand is available at Target, and its Simple Joys brand is available on Amazon. 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.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws relating to our future performance, including statements with respect to the potential effects of the COVID-19 pandemic and the Company’s liquidity. 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, Quarterly Report on Form 10-Q for the quarter ended March 28, 2020, and other reports filed with the Securities and Exchange Commission from time to time under the headings “Risk Factors”. Included among those risks are those related to: the effects of the current coronavirus outbreak; financial difficulties for one or more of our major customers; an overall decrease in consumer spending; our products not being accepted in the marketplace; increased competition in the market place; diminished value of our brands; the failure to protect our intellectual property; the failure to comply with applicable quality standards or regulations; unseasonable or extreme weather conditions; pending and threatened lawsuits; a breach of our information technology systems and the loss of personal data; increased margin pressures, including increased cost of materials and labor; our foreign sourcing arrangements; disruptions in our supply chain; the management and expansion of our business domestically and internationally; the acquisition and integration of other brands and businesses; and changes in our tax obligations, including additional customs, duties or tariffs. 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

Three Fiscal Quarters Ended

September 26,
2020

September 28,
2019

September 26,
2020

September 28,
2019

Net sales

$

865,080

$

943,322

$

2,034,437

$

2,418,764

Cost of goods sold

483,333

540,808

1,170,778

1,376,336

Adverse purchase commitments (inventory and raw materials), net

(1,968

)

303

16,166

1,354

Gross profit

383,715

402,211

847,493

1,041,074

Royalty income, net

9,063

9,192

19,989

27,371

Selling, general, and administrative expenses

279,251

296,733

767,237

828,540

Goodwill impairment

17,742

Intangible asset impairment

30,800

26,500

30,800

Operating income

113,527

83,870

56,003

209,105

Interest expense

16,347

9,966

40,523

28,667

Interest income

(330

)

(200

)

(1,217

)

(937

)

Other (income) expense, net

(2,758

)

483

2,647

474

Loss on extinguishment of debt

7,823

Income before income taxes

100,268

73,621

14,050

173,078

Income tax provision

19,027

13,369

3,347

34,423

Net income

$

81,241

$

60,252

$

10,703

$

138,655

Basic net income per common share

$

1.86

$

1.35

$

0.25

$

3.08

Diluted net income per common share

$

1.85

$

1.34

$

0.24

$

3.06

Dividend declared and paid per common share

$

$

0.50

$

0.60

$

1.50

CARTER’S, INC.

BUSINESS SEGMENT RESULTS

(dollars in thousands)

(unaudited)

 

Fiscal Quarter Ended

Three Fiscal Quarters Ended

September 26,
2020

% of
Total Net Sales

September 28,
2019

% of
Total Net Sales

September 26,
2020

% of
Total Net Sales

September 28,
2019

% of
Total Net Sales

Net sales:

U.S. Retail

$

449,150

51.9

%

$

464,100

49.2

%

$

1,085,883

53.4

%

$

1,264,283

52.3

%

U.S. Wholesale

302,135

34.9

%

352,256

37.3

%

706,009

34.7

%

856,713

35.4

%

International

113,795

13.2

%

126,966

13.5

%

242,545

11.9

%

297,768

12.3

%

Total net sales

$

865,080

100.0

%

$

943,322

100.0

%

$

2,034,437

100.0

%

$

2,418,764

100.0

%

Operating income (loss):

% of
Segment
Net Sales

% of
Segment
Net Sales

% of
Segment
Net Sales

% of
Segment
Net Sales

U.S. Retail

$

47,559

10.6

%

$

49,472

10.7

%

$

38,902

3.6

%

$

124,567

9.9

%

U.S. Wholesale

65,718

21.8

%

54,391

15.4

%

89,141

12.6

%

145,181

16.9

%

International

17,400

15.3

%

6,136

4.8

%

(15,819

)

(6.5

)%

15,351

5.2

%

Corporate expenses (*)

(17,150

)

n/a

(26,129

)

n/a

(56,221

)

n/a

(75,994

)

n/a

Total operating income

$

113,527

13.1

%

$

83,870

8.9

%

$

56,003

2.8

%

$

209,105

8.6

%

(*)

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

Fiscal Quarter Ended September 26, 2020

Three Fiscal Quarters Ended September 26, 2020

Charges:

U.S. Retail

U.S. Wholesale

International

U.S. Retail

U.S. Wholesale

International

Productivity/restructuring costs(1)

$

0.3

$

0.2

$

0.3

$

3.4

$

1.5

$

1.9

Goodwill impairment

17.7

Skip Hop tradename impairment charge

0.5

6.8

3.7

OshKosh tradename impairment charge

13.6

1.6

0.3

Incremental costs associated with COVID-19 pandemic

1.6

1.4

0.3

8.3

8.5

2.0

Retail store operating leases and other long-lived asset impairments, net of gain(2)

1.5

6.3

0.2

Total charges

$

3.4

$

1.6

$

0.6

$

32.1

$

18.4

$

25.8

(1)

The third fiscal quarter ended September 26, 2020, the three fiscal quarters ended September 26, 2020, and the three fiscal quarters ended September 28, 2019 also include corporate charges related to organizational restructuring of $0.4 million, $2.0 million, and $1.6 million, respectively.

(2)

Impairments include an immaterial gain on the remeasurement of retail store operating leases.

Fiscal Quarter Ended September 28, 2019

Three Fiscal Quarters Ended September 28, 2019

Charges:

U.S. Retail

U.S. Wholesale

International

U.S. Retail

U.S. Wholesale

International

Benefit related to sale of inventory previously reserved in China

$

$

$

$

$

$

(2.1

)

Reversal of store restructuring costs previously recorded during the third quarter of fiscal 2017

(0.7

)

Skip Hop tradename impairment charge

1.2

19.1

10.5

1.2

19.1

10.5

Total charges

$

1.2

$

19.1

$

10.5

$

0.5

$

19.1

$

8.4

 

Note: Results may not be additive due to rounding.

CARTER’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)

 

September 26, 2020

December 28, 2019

September 28, 2019

ASSETS

Current assets:

Cash and cash equivalents

$

831,175

$

214,311

$

153,936

Accounts receivable, net of allowance for credit losses of $7,675, $6,354, $4,591, respectively

263,231

251,005

293,203

Finished goods inventories, net of inventory reserves of $30,053, $9,283, and $19,583, respectively

646,608

593,987

723,242

Prepaid expenses and other current assets

56,493

48,454

53,264

Total current assets

1,797,507

1,107,757

1,223,645

Property, plant, and equipment, net of accumulated depreciation of $576,123, $523,848, and $504,833, respectively

274,574

320,168

330,371

Operating lease assets

619,057

687,024

709,523

Tradenames, net

307,955

334,642

334,705

Goodwill

209,507

229,026

228,235

Customer relationships, net

38,147

41,126

41,890

Other assets

34,874

33,374

31,211

Total assets

$

3,281,621

$

2,753,117

$

2,899,580

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

473,473

$

183,641

$

205,782

Current operating lease liabilities

172,364

160,228

158,524

Other current liabilities

115,069

131,631

119,862

Total current liabilities

760,906

475,500

484,168

Long-term debt, net

989,086

594,672

769,525

Deferred income taxes

60,160

74,370

78,916

Long-term operating lease liabilities

587,099

664,372

691,717

Other long-term liabilities

62,489

64,073

62,520

Total liabilities

$

2,459,740

$

1,872,987

$

2,086,846

Commitments and contingencies

Stockholders' equity:

Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at September 26, 2020, December 28, 2019, and September 28, 2019

$

$

$

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 43,648,671, 43,963,103 and 44,287,636 shares issued and outstanding at September 26, 2020, December 28, 2019, and September 28, 2019, respectively

436

440

443

Additional paid-in capital

9,258

Accumulated other comprehensive loss

(41,402

)

(35,634

)

(38,908

)

Retained earnings

853,589

915,324

851,199

Total stockholders' equity

821,881

880,130

812,734

Total liabilities and stockholders' equity

$

3,281,621

$

2,753,117

$

2,899,580

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

Three Fiscal Quarters Ended

September 26, 2020

September 28, 2019

Cash flows from operating activities:

Net income

$

10,703

$

138,655

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation of property, plant, and equipment

66,985

68,005

Amortization of intangible assets

2,784

2,810

Provisions for (recoveries of) excess and obsolete inventory

20,912

4,567

Goodwill impairment

17,742

Intangible asset impairments

26,500

30,800

Other asset impairments and loss on disposal of property, plant and equipment, net of recoveries

9,395

407

Amortization of debt issuance costs

1,641

1,087

Stock-based compensation expense

9,531

13,540

Unrealized foreign currency exchange loss, net

1,354

176

Provisions for (recoveries of) doubtful accounts receivable from customers

7,702

(2,063

)

Loss on extinguishment of debt

7,823

Deferred income tax (benefit) expense

(16,697

)

8,300

Effect of changes in operating assets and liabilities:

Accounts receivable

(21,576

)

(32,792

)

Finished goods inventories

(76,739

)

(152,023

)

Prepaid expenses and other assets

(7,660

)

(16,688

)

Accounts payable and other liabilities

267,551

751

Net cash provided by operating activities

320,128

73,355

Cash flows from investing activities:

Capital expenditures

(25,212

)

(46,138

)

Disposals and recoveries from property, plant, and equipment

749

Net cash used in investing activities

(25,212

)

(45,389

)

Cash flows from financing activities:

Proceeds from senior notes due 2025

500,000

Proceeds from senior notes due 2027

500,000

Payment of senior notes due 2021

(400,000

)

Premiums paid to extinguish debt

(5,252

)

Payment of debt issuance costs

(7,639

)

(5,793

)

Borrowings under secured revolving credit facility

644,000

265,000

Payments on secured revolving credit facility

(744,000

)

(186,000

)

Repurchases of common stock

(45,255

)

(147,464

)

Dividends paid

(26,260

)

(67,528

)

Withholdings from vestings of restricted stock

(4,928

)

(4,214

)

Proceeds from exercises of stock options

3,728

6,881

Net cash provided by (used in) financing activities

319,646

(44,370

)

Effect of exchange rate changes on cash and cash equivalents

2,302

263

Net increase (decrease) in cash and cash equivalents

616,864

(16,141

)

Cash and cash equivalents, beginning of period

214,311

170,077

Cash and cash equivalents, end of period

$

831,175

$

153,936

CARTER’S, INC.

RECONCILIATION OF GAAP TO ADJUSTED RESULTS

(dollars in millions, except earnings per share)

(unaudited)

 

Fiscal Quarter Ended September 26, 2020

Gross
Margin

% Net
Sales

SG&A

% Net
Sales

Operating
Income

% Net
Sales

Income
Taxes

Net
Income

Diluted
EPS

As reported (GAAP)

$

383.7

44.4

%

$

279.3

32.3

%

$

113.5

13.1

%

$

19.0

$

81.2

$

1.85

COVID-19 expenses (b)

(3.3

)

3.3

0.8

2.5

0.06

Retail store operating leases and other long-lived asset impairments, net (c)

(1.5

)

1.5

0.4

1.1

0.03

Productivity/restructuring costs (d)

(1.2

)

1.2

0.2

1.0

0.02

As adjusted (a)

$

383.7

44.4

%

$

273.2

31.6

%

$

119.5

13.8

%

$

20.4

$

85.9

$

1.96

Three Fiscal Quarters Ended September 26, 2020

Gross
Margin

% Net
Sales

SG&A

% Net
Sales

Operating
Income

% Net
Sales

Income
Taxes

Net
Income

Diluted
EPS

As reported (GAAP)

$

847.5

41.7

%

$

767.2

37.7

%

$

56.0

2.8

%

$

3.3

$

10.7

$

0.24

Intangible asset impairment (e)

26.5

6.3

20.2

0.46

Goodwill impairment (f)

17.7

17.7

0.40

COVID-19 expenses (b)

(18.8

)

18.8

4.5

14.3

0.34

Productivity/restructuring costs (d)

(8.8

)

8.8

1.9

6.8

0.15

Retail store operating leases and other long-lived asset impairments, net (c)

(6.5

)

6.5

1.6

4.9

0.11

As adjusted (a)

$

847.5

41.7

%

$

733.2

36.0

%

$

134.3

6.6

%

$

17.7

$

74.7

$

1.70

Fiscal Quarter Ended September 28, 2019

Gross
Margin

% Net
Sales

SG&A

% Net
Sales

Operating
Income

% Net
Sales

Income
Taxes

Net
Income

Diluted
EPS

As reported (GAAP)

$

402.2

42.6

%

$

296.7

31.5

%

$

83.9

8.9

%

$

13.4

$

60.3

$

1.34

Intangible asset impairment (e)

30.8

7.1

23.7

0.53

As adjusted (a)

$

402.2

42.6

%

$

296.7

31.5

%

$

114.7

12.2

%

$

20.5

$

83.9

$

1.87

Three Fiscal Quarters Ended September 28, 2019

Gross
Margin

% Net
Sales

SG&A

% Net
Sales

Operating
Income

% Net
Sales

Income
Taxes

Net
Income

Diluted
EPS

As reported (GAAP)

$

1,041.1

43.0

%

$

828.5

34.3

%

$

209.1

8.6

%

$

34.4

$

138.7

$

3.06

Intangible asset impairment (e)

30.8

7.1

23.7

0.52

Debt extinguishment loss (g)

1.8

6.0

0.13

Productivity/restructuring costs (d)

(1.6

)

1.6

0.4

1.3

0.03

Store restructuring costs (h)

0.7

(0.7

)

(0.2

)

(0.6

)

(0.01

)

China business model change (i)

(2.1

)

(2.1

)

(2.1

)

(0.05

)

As adjusted (a)

$

1,039.0

43.0

%

$

827.6

34.2

%

$

238.7

9.9

%

$

43.6

$

166.9

$

3.68

(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 gross margin, SG&A, operating income, income tax, 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 afford 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)

Net expenses incurred due to the COVID-19 pandemic, including incremental employee-related costs, costs associated with additional protective equipment and cleaning supplies, restructuring costs, and a payroll tax benefit.

(c)

Principally related to U.S. Retail store lease assets.

(d)

Certain lease exit, severance and related costs resulting from restructuring actions (not related to COVID-19).

(e)

Intangible impairment charges related to the OshKosh and Skip Hop tradename assets.

(f)

Goodwill impairment charge recorded in the International segment.

(g)

Related to the redemption of the $400 million aggregate principal amount of senior notes due 2021 in March 2019 that were previously issued by a wholly-owned subsidiary of the Company.

(h)

Reversal of retail store restructuring costs previously recorded during the third quarter of fiscal 2017.

(i)

Benefit related to the sale of inventory previously reserved in China.

 

Note: Results may not be additive due to rounding.

CARTER’S, INC.

RECONCILIATION OF NET INCOME ALLOCABLE TO COMMON SHAREHOLDERS

(unaudited)

 

Fiscal Quarter Ended

Three Fiscal Quarters Ended

September 26,
2020

September 28,
2019

September 26,
2020

September 28,
2019

Weighted-average number of common and common equivalent shares outstanding:

Basic number of common shares outstanding

43,193,752

44,144,135

43,237,319

44,640,413

Dilutive effect of equity awards

156,878

287,904

174,351

302,832

Diluted number of common and common equivalent shares outstanding

43,350,630

44,432,039

43,411,670

44,943,245

As reported on a GAAP Basis:

(dollars in thousands, except per share data)

Basic net income per common share:

Net income

$

81,241

$

60,252

$

10,703

$

138,655

Income allocated to participating securities

(837

)

(565

)

(88

)

(1,244

)

Net income available to common shareholders

$

80,404

$

59,687

$

10,615

$

137,411

Basic net income per common share

$

1.86

$

1.35

$

0.25

$

3.08

Diluted net income per common share:

Net income

$

81,241

$

60,252

$

10,703

$

138,655

Income allocated to participating securities

(834

)

(563

)

(89

)

(1,239

)

Net income available to common shareholders

$

80,407

$

59,689

$

10,614

$

137,416

Diluted net income per common share

$

1.85

$

1.34

$

0.24

$

3.06

As adjusted (a):

Basic net income per common share:

Net income

$

85,903

$

83,932

$

74,700

$

166,937

Income allocated to participating securities

(885

)

(794

)

(759

)

(1,508

)

Net income available to common shareholders

$

85,018

$

83,138

$

73,941

$

165,429

Basic net income per common share

$

1.97

$

1.88

$

1.71

$

3.71

Diluted net income per common share:

Net income

$

85,903

$

83,932

$

74,700

$

166,937

Income allocated to participating securities

(882

)

(791

)

(757

)

(1,502

)

Net income available to common shareholders

$

85,021

$

83,141

$

73,943

$

165,435

Diluted net income per common share

$

1.96

$

1.87

$

1.70

$

3.68

(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 per share data excluding the adjustments discussed above. The Company has excluded $4.7 million and $64.0 million in after-tax expenses from these results for the fiscal quarter and three fiscal quarters ended September 26, 2020, respectively. The Company has excluded $23.7 million and $28.3 million in after-tax expenses from these results for the fiscal quarter and three fiscal quarters ended September 28, 2019, respectively.

 

Note: Results may not be additive due to rounding.

RECONCILIATION OF U.S. GAAP AND NON-GAAP INFORMATION

(dollars in millions)

(unaudited)

 

The following table provides a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods indicated:

 

Fiscal Quarter Ended

Three Fiscal Quarters Ended

Four Fiscal
Quarters Ended

September 26,
2020

September 28,
2019

September 26,
2020

September 28,
2019

September 26,
2020

Net income

$

81.2

$

60.3

$

10.7

$

138.7

$

135.9

Interest expense

16.3

10.0

40.5

28.7

49.5

Interest income

(0.3

)

(0.2

)

(1.2

)

(0.9

)

(1.6

)

Income tax expense

19.0

13.4

3.3

34.4

33.1

Depreciation and amortization

24.1

24.0

69.8

70.8

94.9

EBITDA

$

140.4

$

107.3

$

123.1

$

271.6

$

311.7

Adjustments to EBITDA

Intangible asset impairment (a)

$

$

30.8

$

26.5

$

30.8

$

26.5

Goodwill impairment (b)

17.7

17.7

COVID-19 expenses (c)

3.3

18.8

18.8

Productivity/restructuring costs (d)

1.0

8.5

1.6

8.5

Retail store operating leases and other long-lived asset impairments, net (e)

1.5

6.4

6.4

Customer bankruptcy charges, net (f)

(0.6

)

Debt extinguishment loss (g)

7.8

Store restructuring costs (h)

(0.7

)

China business model change, net (i)

(2.1

)

Total adjustments

5.8

30.8

78.1

37.5

77.5

Adjusted EBITDA

$

146.2

$

138.1

$

201.2

$

309.1

$

389.2

(a)

Related to the write-down of the OshKosh and Skip Hop tradename assets.

(b)

Goodwill impairment charge recorded in the International segment.

(c)

Net expenses incurred due to the COVID-19 pandemic.

(d)

Certain lease exit, severance and related costs resulting from restructuring actions (not related to COVID-19). Amounts for fiscal quarter, three fiscal quarters, and four fiscal quarters ended September 26, 2020 exclude $0.2 million of depreciation expense that is included in the corresponding depreciation and amortization line item.

(e)

Principally related to U.S. Retail store lease assets.

(f)

Recovery related to the Toys "R" Us bankruptcy.

(g)

Related to the redemption of the $400 million aggregate principal amount of senior notes due 2021 in March 2019 that were previously issued by a wholly-owned subsidiary of the Company.

(h)

Reversal of retail store restructuring costs previously recorded during the third quarter of fiscal 2017.

(i)

Benefit related to the sale of inventory previously reserved in China.

 

Note: Results may not be additive due to rounding.

EBITDA and Adjusted EBITDA are supplemental financial measures that are not defined or prepared in accordance with GAAP. We define EBITDA as net income before interest, income taxes, and depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items described in footnotes (a) - (i) to the table above.

We present EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. These measures also afford investors a view of what management considers to be the Company's core performance.

The use of EBITDA and Adjusted EBITDA instead of net income or cash flows from operations has limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. EBITDA and Adjusted EBITDA do not represent net income or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. While EBITDA, Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. EBITDA and Adjusted EBITDA do not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us for working capital, debt service and other purposes.

RECONCILIATION OF U.S. GAAP AND NON-GAAP INFORMATION

(dollars in millions)

(unaudited)

 

The table below reflects the calculation of constant currency net sales on a consolidated and International segment basis for the fiscal quarter and three fiscal quarters ended September 26, 2020:

 

Fiscal Quarter Ended

Reported Net
Sales
September 26,
2020

Impact of
Foreign
Currency
Translation

Constant-Currency
Net Sales

September 26,
2020

Reported Net
Sales

September 28,
2019

Reported
Net Sales
% Change

Constant-Currency
Net Sales
% Change

Consolidated net sales

$

865.1

$

(2.0

)

$

867.1

$

943.3

(8.3

)%

(8.1

)%

International segment net sales

$

113.8

$

(2.0

)

$

115.8

$

127.0

(10.4

)%

(8.8

)%

Three Fiscal Quarters Ended

Reported Net
Sales
September 26,
2020

Impact of
Foreign
Currency
Translation

Constant-Currency
Net Sales
September 26,
2020

Reported Net
Sales
September 28,
2019

Reported
Net Sales
% Change

Constant-Currency
Net Sales
% Change

Consolidated net sales

$

2,034.4

$

(4.7

)

$

2,039.1

$

2,418.8

(15.9

)%

(15.7

)%

International segment net sales

$

242.5

$

(4.7

)

$

247.2

$

297.8

(18.5

)%

(17.0

)%

The Company evaluates its net sales on both an “as reported” and a “constant currency” basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates that occurred between the comparative periods. Constant currency net sales results are calculated by translating current period net sales in local currency to the U.S. dollar amount by using the currency conversion rate for the prior comparative period. The Company consistently applies this approach to net sales for all countries where the functional currency is not the U.S. dollar. The Company believes that the presentation of net sales on a constant currency basis provides useful supplemental information regarding changes in our net sales that were not due to fluctuations in currency exchange rates and such information is consistent with how the Company assesses changes in its net sales between comparative periods.

Contacts:

Sean McHugh
Vice President & Treasurer
sean.mchugh@carters.com

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