Carters Inc 10-Q for FY2021 Q3
Carters Inc (CRI)
10-Q
2021-10-29
For: 2021-10-02
View Original
Added on
April 10, 2026
About this 10-Q
Carters Inc filed this 10-Q on October 29, 2021, covering the quarter ended October 2, 2021 (FY2021 Q3).
Headline figures
Quarter ended October 2, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $890.59M
- up 2.9% from $865.08M a year earlier
- Net income
- $84.98M
- up 4.6% from net income of $81.24M a year earlier
- Diluted EPS
- $1.93
- up 4.3% from $1.85 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended October 2, 2021
OR
For the transition period from __________to __________
Commission file number: 001-31829
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |||||||
| incorporation or organization) | ||||||||
(Address of principal executive offices, including zip code)
(678 ) 791-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No x
As of October 22, 2021, there were 42,265,791 shares of the registrant’s common stock outstanding.
CARTER’S, INC.
INDEX
Page | |||||||||||
| Unaudited Condensed Consolidated Balance Sheets as of October 2, 2021, January 2, 2021 and September 26, 2020 | |||||||||||
| Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and three fiscal quarters ended October 2, 2021 and September 26, 2020 | |||||||||||
| Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and three fiscal quarters ended October 2, 2021 and September 26, 2020 | |||||||||||
| Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the fiscal quarters ended October 2, 2021, July 3, 2021, April 3, 2021, September 26, 2020, June 27, 2020, and March 28, 2020 | |||||||||||
| Unaudited Condensed Consolidated Statements of Cash Flows for the three fiscal quarters ended October 2, 2021 and September 26, 2020 | |||||||||||
Part II. Other Information | |||||||||||
Certifications | |||||||||||
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
| October 2, 2021 | January 2, 2021 | September 26, 2020 | |||||||||||||||
| ASSETS | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | ||||||||||||||
Accounts receivable, net of allowance for credit losses of $ | |||||||||||||||||
Finished goods inventories, net of inventory reserves of $ | |||||||||||||||||
| Prepaid expenses and other current assets | |||||||||||||||||
| Total current assets | |||||||||||||||||
Property, plant, and equipment, net of accumulated depreciation of $ | |||||||||||||||||
| Operating lease assets | |||||||||||||||||
| Tradenames, net | |||||||||||||||||
| Goodwill | |||||||||||||||||
| Customer relationships, net | |||||||||||||||||
| Other assets | |||||||||||||||||
| Total assets | $ | $ | $ | ||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | $ | $ | $ | ||||||||||||||
| Current operating lease liabilities | |||||||||||||||||
| Other current liabilities | |||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Long-term debt, net | |||||||||||||||||
| Deferred income taxes | |||||||||||||||||
| Long-term operating lease liabilities | |||||||||||||||||
| Other long-term liabilities | |||||||||||||||||
| Total liabilities | $ | $ | $ | ||||||||||||||
Commitments and contingencies - Note 14 | |||||||||||||||||
| Stockholders’ equity: | |||||||||||||||||
Preferred stock; par value $ | $ | $ | $ | ||||||||||||||
Common stock, voting; par value $ | |||||||||||||||||
| Additional paid-in capital | |||||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ( | ||||||||||||||
| Retained earnings | |||||||||||||||||
| Total stockholders’ equity | |||||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | $ | ||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
1
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
| Fiscal quarter ended | Three fiscal quarters ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Adverse purchase commitments (inventory and raw materials), net | ( | ( | |||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Royalty income, net | |||||||||||||||||||||||
| Selling, general, and administrative expenses | |||||||||||||||||||||||
| Goodwill impairment | |||||||||||||||||||||||
| Intangible asset impairment | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| Other expense (income), net | ( | ( | |||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax provision | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Basic net income per common share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted net income per common share | $ | $ | $ | $ | |||||||||||||||||||
| Dividend declared and paid per common share | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
2
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
| Fiscal quarter ended | Three fiscal quarters ended | ||||||||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
3
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands, except share amounts)
(unaudited)
| Common stock - shares | Common stock - $ | Additional paid-in capital | Accumulated other comprehensive loss | Retained earnings | Total stockholders’ equity | ||||||||||||||||||||||||||||||
| Balance at December 28, 2019 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Exercise of stock options | |||||||||||||||||||||||||||||||||||
| Withholdings from vesting of restricted stock | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Restricted stock activity | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | ||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Cash dividends declared and paid | — | ( | ( | ||||||||||||||||||||||||||||||||
| Comprehensive loss | — | ( | ( | ( | |||||||||||||||||||||||||||||||
| Balance at March 28, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Exercise of stock options | |||||||||||||||||||||||||||||||||||
| Withholdings from vesting of restricted stock | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Restricted stock activity | |||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | ||||||||||||||||||||||||||||||||||
| Comprehensive income | — | ||||||||||||||||||||||||||||||||||
| Balance at June 27, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Exercise of stock options | |||||||||||||||||||||||||||||||||||
| Withholdings from vesting of restricted stock | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Restricted stock activity | |||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | ||||||||||||||||||||||||||||||||||
| Comprehensive income | — | ||||||||||||||||||||||||||||||||||
| Balance at September 26, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
4
| Common stock - shares | Common stock - $ | Additional paid-in capital | Accumulated other comprehensive loss | Retained earnings | Total stockholders’ equity | ||||||||||||||||||||||||||||||
| Balance at January 2, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Exercise of stock options | |||||||||||||||||||||||||||||||||||
| Withholdings from vesting of restricted stock | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Restricted stock activity | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | ||||||||||||||||||||||||||||||||||
| Comprehensive income | — | ||||||||||||||||||||||||||||||||||
| Balance at April 3, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Exercise of stock options | |||||||||||||||||||||||||||||||||||
| Withholdings from vesting of restricted stock | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Restricted stock activity | |||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | ||||||||||||||||||||||||||||||||||
| Cash dividends declared and paid | — | ( | ( | ||||||||||||||||||||||||||||||||
| Comprehensive income | — | ||||||||||||||||||||||||||||||||||
| Balance at July 3, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Exercise of stock options | |||||||||||||||||||||||||||||||||||
| Withholdings from vesting of restricted stock | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Restricted stock activity | |||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | ||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||
| Cash dividends declared and paid | — | ( | ( | ||||||||||||||||||||||||||||||||
| Comprehensive (loss) income | — | ( | |||||||||||||||||||||||||||||||||
| Balance at October 2, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
5
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
| Three fiscal quarters ended | |||||||||||
| October 2, 2021 | September 26, 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation of property, plant, and equipment | |||||||||||
| Amortization of intangible assets | |||||||||||
| Provisions for excess and obsolete inventory | |||||||||||
| Goodwill impairment | |||||||||||
| Intangible asset impairments | |||||||||||
| Other asset impairments and loss on disposal of property, plant and equipment, net of recoveries | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Stock-based compensation expense | |||||||||||
| Unrealized foreign currency exchange loss, net | |||||||||||
| Provisions for doubtful accounts receivable from customers | |||||||||||
| Unrealized gain on investments | ( | ( | |||||||||
| Deferred income taxes expense (benefit) | ( | ||||||||||
| Effect of changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Finished goods inventories | ( | ( | |||||||||
Prepaid expenses and other assets(*) | ( | ||||||||||
| Accounts payable and other liabilities | ( | ||||||||||
| Net cash provided by operating activities | $ | $ | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | $ | ( | $ | ( | |||||||
Proceeds from sale of investments(*) | |||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from senior notes due 2025 | $ | $ | |||||||||
| Payment of debt issuance costs | ( | ( | |||||||||
| Borrowings under secured revolving credit facility | |||||||||||
| Payments on secured revolving credit facility | ( | ||||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Withholdings from vesting of restricted stock | ( | ( | |||||||||
| Proceeds from exercises of stock options | |||||||||||
| Net cash (used in) provided by financing activities | $ | ( | $ | ||||||||
| Net effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net (decrease) increase in cash and cash equivalents | $ | ( | $ | ||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
(*)Cash flows for the three fiscal quarters ended September 26, 2020 were revised to reflect the reclassification of $1.4 million proceeds from sale of investments from cash flows from operating activities to cash flows from investing activities.
See accompanying notes to the unaudited condensed consolidated financial statements.
6
CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY
NOTE 2 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). All intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, comprehensive income, statement of stockholders’ equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter ended October 2, 2021 are not necessarily indicative of the results that may be expected for the current fiscal year ending January 1, 2022.
The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
The accompanying condensed consolidated balance sheet as of January 2, 2021 was derived from the Company’s audited consolidated financial statements included in its most recently filed Annual Report on Form 10-K. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q.
COVID-19
The Company is closely monitoring the effects of the ongoing coronavirus (“COVID-19”) pandemic and its impact on our business. Additionally, the Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of October 2, 2021 and through the date of this report filing. The accounting matters assessed included, but were not limited to, our allowance for credit losses, inventory reserves, adverse fabric purchase commitments, stock-based compensation, and the carrying value of our goodwill, indefinite-lived intangible assets, and other long-lived assets. Based on these assessments, in the first three quarters of fiscal 2021, the Company released adverse purchase commitment reserves of $8.4 million related to better than expected sales of inventory and utilization of fabric that was reserved for in the first quarter of fiscal 2020 due to COVID-19 related disruptions. As of October 2, 2021, there is no outstanding reserve for adverse fabric purchase commitments related to COVID-19 disruptions in fiscal 2020.
Additional COVID-19 related charges were $0.3 million and $3.5 million in the third quarter of fiscal 2021 and the first three quarters of fiscal 2021, respectively. These charges were primarily related to the costs associated with additional personal protective equipment and cleaning supplies.
Accounting Policies
The accounting policies the Company follows are set forth in its most recently filed Annual Report on Form 10-K. There have been no material changes to these accounting policies.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - REVENUE RECOGNITION
The Company’s revenues are earned from contracts or arrangements with retail and wholesale customers and licensees. Contracts include written agreements as well as arrangements that are implied by customary practices or law.
Disaggregation of Revenue
The Company sells its products directly to consumers (“direct-to-consumer”) and to other retail companies and partners that subsequently sell the products directly to their own retail customers. The Company also earns royalties from certain of its licensees. Disaggregated revenues from these sources for the third quarter and first three quarters of fiscal 2021 and 2020 were as follows:
| Fiscal quarter ended October 2, 2021 | ||||||||||||||||||||||||||
| (dollars in thousands) | U.S. Retail | U.S. Wholesale | International | Total | ||||||||||||||||||||||
| Wholesale channel | $ | $ | $ | $ | ||||||||||||||||||||||
| Direct-to-consumer | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
| Royalty income | $ | $ | $ | $ | ||||||||||||||||||||||
| Three fiscal quarters ended October 2, 2021 | ||||||||||||||||||||||||||
| (dollars in thousands) | U.S. Retail | U.S. Wholesale | International | Total | ||||||||||||||||||||||
| Wholesale channel | $ | $ | $ | $ | ||||||||||||||||||||||
| Direct-to-consumer | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
| Royalty income | $ | $ | $ | $ | ||||||||||||||||||||||
| Fiscal quarter ended September 26, 2020 | ||||||||||||||||||||||||||
| (dollars in thousands) | U.S. Retail | U.S. Wholesale | International | Total | ||||||||||||||||||||||
| Wholesale channel | $ | $ | $ | $ | ||||||||||||||||||||||
| Direct-to-consumer | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
| Royalty income | $ | $ | $ | $ | ||||||||||||||||||||||
| Three fiscal quarters ended September 26, 2020 | ||||||||||||||||||||||||||
| (dollars in thousands) | U.S. Retail | U.S. Wholesale | International | Total | ||||||||||||||||||||||
| Wholesale channel | $ | $ | $ | $ | ||||||||||||||||||||||
| Direct-to-consumer | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
| Royalty income | $ | $ | $ | $ | ||||||||||||||||||||||
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accounts Receivable from Customers and Licensees
The components of Accounts receivable, net, were as follows:
| (dollars in thousands) | October 2, 2021 | January 2, 2021 | September 26, 2020 | |||||||||||||||||
| Trade receivables from wholesale customers, net | $ | $ | $ | |||||||||||||||||
| Royalties receivable | ||||||||||||||||||||
| Tenant allowances and other receivables | ||||||||||||||||||||
| Total receivables | $ | $ | $ | |||||||||||||||||
Less: Wholesale accounts receivable reserves(*) | ( | ( | ( | |||||||||||||||||
| Accounts receivable, net | $ | $ | $ | |||||||||||||||||
(*)Includes allowance for credit losses of $8.7 million, $5.9 million, and $7.7 million for the periods ended October 2, 2021, January 2, 2021, and September 26, 2020, respectively.
Contract Assets and Liabilities
The Company’s contract assets are not material.
Contract Liabilities
The Company recognizes a contract liability when it has received consideration from a customer and has a future obligation to transfer goods to the customer. Total contract liabilities consisted of the following amounts:
| (dollars in thousands) | October 2, 2021 | January 2, 2021 | September 26, 2020 | ||||||||||||||
| Contract liabilities - current: | |||||||||||||||||
| Unredeemed gift cards | $ | $ | $ | ||||||||||||||
| Unredeemed customer loyalty rewards | |||||||||||||||||
Carter’s credit card - upfront bonus(1) | |||||||||||||||||
Total contract liabilities - current(2) | $ | $ | $ | ||||||||||||||
Contract liabilities - non-current(3) | $ | $ | $ | ||||||||||||||
| Total contract liabilities | $ | $ | $ | ||||||||||||||
(1)The Company received an upfront signing bonus from a third-party financial institution, which will be recognized as revenue on a straight-line basis over the term of the agreement. This amount reflects the current portion of this bonus to be recognized as revenue over the next twelve months.
(2)Included with Other current liabilities on the Company’s consolidated balance sheets.
NOTE 4 - LEASES
The Company has operating leases for retail stores, distribution centers, corporate offices, data centers, and certain equipment. The Company’s leases generally have initial terms ranging from 1 year to 10 years, some of which may include options to extend the leases for up to 5 years, and some of which may include options to early terminate the lease.
As of the periods presented, the Company’s finance leases were not material to the consolidated balance sheets, consolidated statements of operations, or statements of cash flows.
The following components of lease expense are included in Selling, general and administrative expenses on the Company’s consolidated statements of operations for the third quarter and first three quarters of fiscal 2021 and 2020:
| Fiscal quarter ended | Three fiscal quarters ended | |||||||||||||||||||||||||
| (dollars in thousands) | October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
Variable lease cost (*) | ||||||||||||||||||||||||||
| Net lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
(*)Includes short-term leases, which are not material, and operating lease asset impairment charges.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cash paid for amounts included in the measurement of operating lease liabilities in the third quarter and first three quarters of fiscal 2021 were $47.6 million and $162.3 million, respectively.
Operating lease assets obtained in exchange for operating lease liabilities in the third quarter and first three quarters of fiscal 2021 were $18.6 million and $26.2 million, respectively.
As of October 2, 2021, the maturities of lease liabilities were as follows:
| (dollars in thousands) | Operating leases | ||||||||||||||||
| Remainder of 2021 | $ | ||||||||||||||||
| 2022 | |||||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| 2026 | |||||||||||||||||
| After 2026 | |||||||||||||||||
| Total lease payments | $ | ||||||||||||||||
| Less: Interest | ( | ||||||||||||||||
Present value of lease liabilities(*) | $ | ||||||||||||||||
(*)As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments.
As of October 2, 2021, the minimum rental commitments for additional operating lease contracts, primarily for retail stores, that have not yet commenced are $2.2 million. These operating leases will commence between the fourth quarter of fiscal 2021 and fiscal year 2022 with lease terms of 3 years to 10 years.
NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of Accumulated other comprehensive loss consisted of the following:
| (dollars in thousands) | October 2, 2021 | January 2, 2021 | September 26, 2020 | ||||||||||||||
| Cumulative foreign currency translation adjustments | $ | ( | $ | ( | $ | ( | |||||||||||
Pension and post-retirement obligations(*) | ( | ( | ( | ||||||||||||||
| Total accumulated other comprehensive loss | $ | ( | $ | ( | $ | ( | |||||||||||
(*)Net of income taxes of $3.5 million, $3.5 million, and $2.8 million for the period ended October 2, 2021, January 2, 2021, and September 26, 2020, respectively.
During the first three quarters of both fiscal 2021 and fiscal 2020, no amounts were reclassified from Accumulated other comprehensive loss to the statement of operations.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 – GOODWILL AND INTANGIBLE ASSETS
The balances and changes in the carrying amount of Goodwill attributable to each segment were as follows:
| (dollars in thousands) | U.S. Retail | U.S. Wholesale | International | Total | |||||||||||||||||||
| Balance at December 28, 2019 | $ | $ | $ | $ | |||||||||||||||||||
Goodwill impairment(1) | ( | ( | |||||||||||||||||||||
| Foreign currency impact | ( | ( | |||||||||||||||||||||
| Balance at September 26, 2020 | $ | $ | $ | $ | |||||||||||||||||||
Balance at January 2, 2021(2) | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency impact | |||||||||||||||||||||||
Balance at October 2, 2021(2) | $ | $ | $ | $ | |||||||||||||||||||
(1)In the first quarter of fiscal 2020, a charge of $17.7 million was recorded to reflect the impairment of the value ascribed to the goodwill in the Other International reporting unit in the International segment.
A summary of the carrying value of the Company’s intangible assets were as follows:
| October 2, 2021 | January 2, 2021 | ||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Weighted-average useful life | Gross amount | Accumulated amortization | Net amount | Gross amount | Accumulated amortization | Net amount | ||||||||||||||||||||||||||||||||||
Carter’s tradename | Indefinite | $ | $ | — | $ | $ | $ | — | $ | ||||||||||||||||||||||||||||||||
OshKosh tradename | Indefinite | — | — | ||||||||||||||||||||||||||||||||||||||
Skip Hop tradename | Indefinite | — | — | ||||||||||||||||||||||||||||||||||||||
| Finite-life tradenames | |||||||||||||||||||||||||||||||||||||||||
| Total tradenames | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Skip Hop customer relationships | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Carter’s Mexico customer relationships | |||||||||||||||||||||||||||||||||||||||||
| Total customer relationships | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| September 26, 2020 | |||||||||||||||||||||||
| (dollars in thousands) | Weighted-average useful life | Gross amount | Accumulated amortization | Net amount | |||||||||||||||||||
Carter’s tradename | Indefinite | $ | $ | — | $ | ||||||||||||||||||
OshKosh tradename(1) | Indefinite | — | |||||||||||||||||||||
Skip Hop tradename(2) | Indefinite | — | |||||||||||||||||||||
| Finite-life tradenames | |||||||||||||||||||||||
| Total tradenames | $ | $ | $ | ||||||||||||||||||||
| Skip Hop customer relationships | $ | $ | $ | ||||||||||||||||||||
| Carter’s Mexico customer relationships | |||||||||||||||||||||||
| Total customer relationships | $ | $ | $ | ||||||||||||||||||||
(1)In the first quarter of fiscal 2020, a charge of $13.6 million, $1.6 million, and $0.3 million was recorded on our indefinite-lived OshKosh tradename asset in the U.S. Retail, U.S. Wholesale, and International segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived OshKosh tradename asset.
Amortization expense for intangible assets subject to amortization was approximately $0.9 2.8
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The estimated amortization expense for the next five fiscal years is as follows:
| (dollars in thousands) | Amortization expense | ||||
| Remainder of 2021 | $ | ||||
| 2022 | $ | ||||
| 2023 | $ | ||||
| 2024 | $ | ||||
| 2025 | $ | ||||
| 2026 | $ | ||||
NOTE 7 – COMMON STOCK
Open Market Share Repurchases
The Company repurchased and retired shares in open market transactions in the following amounts for the fiscal periods indicated:
| Fiscal quarter ended | Three fiscal quarters ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Number of shares repurchased | |||||||||||||||||||||||
| Aggregate cost of shares repurchased (dollars in thousands) | $ | $ | $ | $ | |||||||||||||||||||
| Average price per share | $ | $ | $ | $ | |||||||||||||||||||
The total aggregate remaining capacity under outstanding repurchase authorizations as of October 2, 2021 was approximately $540.2 million. The authorizations have no expiration date.
In the third quarter of fiscal 2021, the Company reinstated its common stock share repurchase program. The Company had previously announced the suspension of its common stock share repurchase program, in connection with the COVID-19 pandemic, at the end of the first quarter in fiscal 2020. Future repurchases may occur from time to time in the open market, in privately negotiated transactions, or otherwise. The timing and amount of any repurchases will be at the discretion of the Company subject to restrictions under the Company’s revolving credit facility, market conditions, stock price, other investment priorities, and other factors.
Dividends
On May 1, 2020, in connection with the COVID-19 pandemic, the Company suspended its quarterly cash dividend. As a result, the Company did not declare or pay cash dividends through April 27, 2021. In each of the second and third quarters of fiscal 2021, the Board of Directors declared and the Company paid quarterly cash dividends of $0.40
In the first quarter of fiscal 2020, the Board of Directors declared and the Company paid cash dividends of $0.60 per common share. The Company did not declare or pay cash dividends in the second or third quarters of fiscal 2020.
The Board of Directors will evaluate future dividend declarations based on a number of factors, including restrictions under the Company’s secured revolving credit facility, business conditions, the Company’s financial performance, and other considerations. Provisions in the Company’s secured revolving credit facility could have the effect of restricting the Company’s ability to pay cash dividends on, or make future repurchases of, its common stock, as further described in Note 8, Long-Term Debt to the consolidated financial statements.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 – LONG-TERM DEBT
Long-term debt consisted of the following:
| (dollars in thousands) | October 2, 2021 | January 2, 2021 | September 26, 2020 | ||||||||||||||
$500 million | $ | $ | $ | ||||||||||||||
$500 million | |||||||||||||||||
| Total senior notes | $ | $ | $ | ||||||||||||||
| Less unamortized issuance-related costs for senior notes | ( | ( | ( | ||||||||||||||
| Senior notes, net | $ | $ | $ | ||||||||||||||
| Secured revolving credit facility | |||||||||||||||||
Total long-term debt, net | $ | $ | $ | ||||||||||||||
Secured Revolving Credit Facility
As of October 2, 2021, the Company had no outstanding borrowings under its secured revolving credit facility, exclusive of $4.4 million of outstanding letters of credit. As of October 2, 2021, approximately $745.6 million remained available for future borrowing. Any outstanding borrowings under the Company’s secured revolving credit facility are classified as non-current liabilities on the Company’s consolidated balance sheets because of the contractual repayment terms under the credit facility.
On April 21, 2021, the Company, through its wholly owned subsidiary, The William Carter Company (“TWCC”), entered into Amendment No. 3 to its fourth amended and restated credit agreement (“Amendment No. 3”). Among other things, Amendment No. 3 provides that through the remainder of the Restricted Period, which ends on the date the Company delivers its financial statements and associated certificates relating to the third fiscal quarter of 2021:
•the Company must maintain a minimum liquidity (defined as cash-on-hand plus availability under the secured revolving credit facility) on the last day of each fiscal month of at least $950 million (the “Revised Liquidity Requirement”), which was increased by $250 million from $700 million; and
•the Company may make additional restricted payments, including to pay cash dividends and repurchase common stock, in an amount not to exceed $250 million, provided that (a) no default or event of default will have occurred and be continuing or would result from the payment and (b) after giving effect to the payment, the Company would have been in compliance with Revised Liquidity Requirement as of the last day of the most recent month.
Approximately $0.2 million, including both bank fees and other third party expenses, has been capitalized in connection with Amendment No. 3 and is being amortized over the remaining term of the secured revolving credit facility.
As of October 2, 2021, the interest rate margins applicable to the secured revolving credit facility were 1.125 % for LIBOR (London Interbank Offered Rate) rate loans and 0.125 % for base rate loans.
As of October 2, 2021, the Company was in compliance with its financial and other covenants under the secured revolving credit facility.
NOTE 9 – STOCK-BASED COMPENSATION
The Company recorded stock-based compensation expense as follows:
| Fiscal quarter ended | Three fiscal quarters ended | ||||||||||||||||||||||
| (dollars in thousands) | October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | |||||||||||||||||||
| Stock options | $ | $ | $ | $ | |||||||||||||||||||
| Restricted stock: | |||||||||||||||||||||||
| Time-based awards | |||||||||||||||||||||||
| Performance-based awards | ( | ( | |||||||||||||||||||||
| Stock awards | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 – INCOME TAXES
As of October 2, 2021, the Company had gross unrecognized income tax benefits of approximately $10.8 million, of which $9.1 million, if ultimately recognized, may affect the Company’s effective income tax rate in the periods settled. The Company has recorded tax positions for which the ultimate deductibility is more likely than not, but for which there is uncertainty about the timing of such deductions.
Included in the reserves for unrecognized tax benefits at October 2, 2021 is approximately $2.3 million of reserves for which the statute of limitations is expected to expire within the next 12 months. If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective income tax rate for fiscal 2021 or fiscal 2022 along with the effective income tax rate in the quarter in which the benefits are recognized.
The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and recognizes penalties related to unrecognized income tax benefits as a component of income tax expense. Interest expense recorded on uncertain tax positions was not material for the third fiscal quarter ended October 2, 2021 and September 26, 2020. Interest expense recorded on uncertain tax positions was $0.4 million and $0.6 million for the first three quarters of fiscal 2021 and fiscal 2020, respectively. The Company had approximately $2.3 million, $2.7 million, and $2.9 million of interest accrued on uncertain tax positions as of October 2, 2021, January 2, 2021, and September 26, 2020, respectively.
NOTE 11 – FAIR VALUE MEASUREMENTS
Investments
The Company invests in marketable securities, principally equity-based mutual funds, to mitigate the risk associated with the investment return on employee deferrals of compensation. All of the marketable securities are included in Other assets on the accompanying consolidated balance sheets, and their aggregate fair values were approximately $17.1 million, $20.2 million, and $18.9 million at October 2, 2021, January 2, 2021, and September 26, 2020, respectively. These investments are classified as Level 1 within the fair value hierarchy. The change in the aggregate fair values of marketable securities is due to the net activity of gains and losses and any contributions and distributions during the period. Gains on the investments in marketable securities were $0.6 million and $1.9 million for the third fiscal quarter and three fiscal quarters ended October 2, 2021, respectively. Gains on the investments in marketable securities were $2.5 million and $0.6 million for the third fiscal quarter and first three fiscal quarters ended September 26, 2020. These amounts are included in Other expense (income), net on the Company’s consolidated statement of operations.
Borrowings
As of October 2, 2021, the Company had no outstanding borrowings under its secured revolving credit facility.
The fair value of the Company’s senior notes at October 2, 2021 was approximately $1.05 billion. The fair value of these senior notes with a notional value and carrying value (gross of debt issuance costs) of $1.00 billion was estimated using a quoted price as provided in the secondary market, which considers the Company’s credit risk and market related conditions, and is therefore within Level 2 of the fair value hierarchy.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 – EARNINGS PER SHARE
The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:
| Fiscal quarter ended | Three fiscal quarters ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Weighted-average number of common and common equivalent shares outstanding: | |||||||||||||||||||||||
Basic number of common shares outstanding | |||||||||||||||||||||||
| Dilutive effect of equity awards | |||||||||||||||||||||||
| Diluted number of common and common equivalent shares outstanding | |||||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| (dollars in thousands, except per share data) | |||||||||||||||||||||||
| Basic net income per common share: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
Income allocated to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | |||||||||||||||||||
| Basic net income per common share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted net income per common share: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
Income allocated to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | |||||||||||||||||||
| Diluted net income per common share | $ | $ | $ | $ | |||||||||||||||||||
Anti-dilutive awards excluded from diluted earnings per share computation(1) | |||||||||||||||||||||||
(1)The volume of anti-dilutive awards is, in part, due to the related unamortized compensation costs.
NOTE 13 – OTHER CURRENT LIABILITIES
Other current liabilities at the end of any comparable period, were as follows:
| (dollars in thousands) | October 2, 2021 | January 2, 2021 | September 26, 2020 | ||||||||||||||
| Accrued bonuses and incentive compensation | $ | $ | $ | ||||||||||||||
| Accrued employee benefits | |||||||||||||||||
| Unredeemed gift cards | |||||||||||||||||
| Accrued taxes | |||||||||||||||||
| Accrued interest | |||||||||||||||||
| Accrued salaries and wages | |||||||||||||||||
| Income taxes payable | |||||||||||||||||
| Accrued other | |||||||||||||||||
| Other current liabilities | $ | $ | $ | ||||||||||||||
NOTE 14 – COMMITMENTS AND CONTINGENCIES
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 – SEGMENT INFORMATION
The tables below presents certain information for our reportable segments and unallocated corporate expenses for the periods indicated:
| Fiscal quarter ended | Three fiscal quarters ended | ||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | October 2, 2021 | % of consolidated net sales | September 26, 2020 | % of consolidated net sales | October 2, 2021 | % of consolidated net sales | September 26, 2020 | % of consolidated net sales | |||||||||||||||||||||||||||||||||||||||
Net sales: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Retail | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
| U.S. Wholesale | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| International | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Consolidated net sales | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
Operating income (loss): | % of segment net sales | % of segment net sales | % of segment net sales | % of segment net sales | |||||||||||||||||||||||||||||||||||||||||||
| U.S. Retail | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
| U.S. Wholesale | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| International | % | % | % | ( | ( | % | |||||||||||||||||||||||||||||||||||||||||
Corporate expenses(*) | ( | n/a | ( | n/a | ( | n/a | ( | n/a | |||||||||||||||||||||||||||||||||||||||
| Consolidated operating income | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
(*)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.
| (dollars in millions) | Fiscal quarter ended October 2, 2021 | Three fiscal quarters ended October 2, 2021 | |||||||||||||||||||||||||||||||||
| Charges: | U.S. Retail | U.S. Wholesale | International | U.S. Retail | U.S. Wholesale | International | |||||||||||||||||||||||||||||
| Incremental costs associated with COVID-19 pandemic | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Organizational restructuring(1) | ( | ( | |||||||||||||||||||||||||||||||||
Gain on modification of retail store leases(2) | ( | ( | |||||||||||||||||||||||||||||||||
Total charges(3) | $ | ( | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||
(1)First three fiscal quarters ended October 2, 2021 include $2.3 million of costs associated with the early exit of the Canada corporate office lease. Fiscal quarter and first three fiscal quarters ended October 2, 2021 also includes a corporate benefit related to organizational restructuring of $0.1 million and corporate charges related to organizational restructuring of $0.8 million, respectively.
(2)Related to gains on the modification of previously impaired retail store leases.
(3)Total charges for the first three fiscal quarters ended October 2, 2021 exclude a customer bankruptcy recovery of $38,000 .
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
| (dollars in millions) | 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 | |||||||||||||||||||||||||||||
Organizational restructuring(1) | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Goodwill impairment | |||||||||||||||||||||||||||||||||||
Skip Hop tradename impairment charge | |||||||||||||||||||||||||||||||||||
OshKosh tradename impairment charge | |||||||||||||||||||||||||||||||||||
| Incremental costs associated with COVID-19 pandemic | |||||||||||||||||||||||||||||||||||
Retail store operating leases and other long-lived asset impairments(2) | |||||||||||||||||||||||||||||||||||
| Total charges | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(1)The third fiscal quarter ended September 26, 2020 and the first three fiscal quarters ended September 26, 2020 also include corporate charges related to organizational restructuring of $0.4 million and $2.0 million, respectively.
NOTE 16 – ORGANIZATIONAL RESTRUCTURING AND OFFICE CONSOLIDATION
As previously announced, the Company initiated several organizational restructuring initiatives which included a reorganization of staffing models across multiple functions to drive labor savings and increase efficiencies, the consolidation of certain functions into our corporate headquarters in Atlanta, Georgia, and over 100 planned store closures by the end of fiscal 2021.
In conjunction with these initiatives, the Company recorded the following charges in selling, general and administrative expenses:
| Fiscal quarter ended | Three fiscal quarters ended | ||||||||||||||||||||||
| (dollars in thousands) | October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | |||||||||||||||||||
Severance and other termination benefits(*) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Lease exit costs | |||||||||||||||||||||||
Relocation and recruiting(*) | ( | ( | |||||||||||||||||||||
| Other closure costs | |||||||||||||||||||||||
| Total | $ | ( | $ | $ | $ | ||||||||||||||||||
(*)Severance and other termination benefits and relocation and recruiting in the third quarter and three fiscal quarters ended October 2, 2021 reflect revised severance accrual assumptions.
The Company paid approximately $0.9 million and $5.4 million in severance and other termination benefits during the third fiscal quarter and first three fiscal quarters ended October 2, 2021, respectively. As of October 2, 2021, there was approximately $1.4 million in reserves related to severance and other termination benefits expected to be paid out through the first quarter of fiscal 2022 included in Other current liabilities in the accompanying unaudited condensed consolidated balance sheets as of October 2, 2021. The Company expects to incur additional restructuring-related severance charges of approximately $0.5 million through fiscal 2021.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 relating to our future performance, including, without limitation, statements with respect to our anticipated financial results for any other quarter or period in fiscal 2021 or any other future period, assessment of our performance and financial position, drivers of our sales and earnings growth, and the effects of the COVID-19 pandemic, including with respect to our plans to close certain retail stores and the impacts of supply chain delays and increased freight costs. 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 any of the 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
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
described in our most recently filed Annual Report on Form 10-K, in Part I. under the heading “Item 1A. Risk Factors”, and other reports filed by the Company with the Securities and Exchange Commission from time to time.
OVERVIEW
We are the largest branded marketer in North America of apparel exclusively for babies and young children. We own two of the most highly recognized and most trusted brand names in the children’s apparel industry, Carter’s and OshKosh B’gosh (or “OshKosh”), a leading baby and young child lifestyle brand, Skip Hop, and a newly launched brand that focuses on sustainable clothing, little planet.
Established in 1865, our Carter’s brand is recognized and trusted by consumers for high-quality apparel and accessories for children in sizes newborn to 14.
Established in 1895, OshKosh is a well-known brand, trusted by consumers for high-quality apparel and accessories for children in sizes newborn to 14, with a focus on playclothes for toddlers and young children. We acquired the OshKosh brand in 2005.
Established in 2003, the Skip Hop brand re-thinks, re-energizes, and re-imagines durable necessities to create higher value, superior quality, and top-performing products for parents, babies, and toddlers. We acquired the Skip Hop brand in 2017.
Launched in 2021, the little planet brand focuses on sustainable clothing through the sourcing of mostly organic cotton as certified under the Global Organic Textile Standard. This brand includes a wide assortment of baby apparel and accessories, sleepwear, and gift bundles.
Additionally, our Child of Mine exclusive brand is sold at Walmart, our Just One You exclusive brand at Target, and our Simple Joys exclusive brand on Amazon.
Our mission is to serve the needs of all families with young children, with a vision to be the world’s favorite brands in young children’s apparel and products. We believe our brands provide a complementary product offering and aesthetic, are each uniquely positioned in the marketplace, and offer strong value to families with young children. Our multi-channel global business model, which includes retail stores, eCommerce, and wholesale sales channels, as well as omni-channel capabilities in the United States and Canada, enables us to reach a broad range of consumers around the world. We have extensive experience in the young children’s apparel and accessories market and focus on delivering products that satisfy our consumers’ needs. As of October 2, 2021, the Company operated 984 retail stores in North America.
The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Form 10-Q and audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the 2020 fiscal year ended January 2, 2021.
Segments
Our three business segments are: U.S. Retail, U.S. Wholesale, and International. These segments are our operating and reporting segments. Our U.S. Retail segment consists of revenue primarily from sales of products in the United States through our retail stores and eCommerce websites. Similarly, our U.S. Wholesale segment consists of revenue primarily from sales in the United States of products to our wholesale partners. Finally, our International segment consists of revenue primarily from sales of products outside the United States, largely through our retail stores and eCommerce websites in Canada and Mexico, and sales to our international wholesale customers and licensees.
Recent Developments
The COVID-19 pandemic continues to impact our business and supply chain operations, causing delays in the production and transportation of our product. We expect these delays, and the increased costs to mitigate these delays, to adversely impact our financial results for the fourth quarter of fiscal 2021.
In the fourth quarter of fiscal 2020, we announced plans to close over 100 retail stores by the end of fiscal 2021. We closed approximately 110 stores in the United States in the first three quarters of fiscal 2021, and we expect to close approximately 5 more stores in the remainder of fiscal 2021. These retail store closures are primarily related to less profitable stores or stores in less trafficked shopping centers. We continue to look for profitable retail store locations that allow us to better serve customers, including our omni-channel customers.
18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Third Fiscal Quarter 2021 Financial Highlights
•Consolidated net sales increased $25.5 million, or 2.9%, to $890.6 million in the third quarter of fiscal 2021.
◦Retail store traffic in the United States increased as a result of progress in vaccinations, easing restrictions related to COVID-19, the passage of pandemic relief legislation in March 2021, including enhanced child tax credits, and a return to in-person instruction driving back-to-school sales.
◦Growth in our North American retail store sales was primarily driven by increased average selling prices per unit as a result of decreased promotions.
◦While revenues were negatively impacted, operating margin slightly improved due to the closure of approximately 110 less profitable retail stores in the United States in the first three quarters of fiscal 2021.
◦We saw significant growth in sales from our international wholesale partners as these partners recovered from business disruptions as a result of COVID-19.
◦Our omni-channel programs continued to deliver growth as a result of our investments and enhancements in these programs, which included implementing omni-channel programs in Canada in the second quarter of fiscal 2021.
◦While demand from our wholesale customers has remained strong, our sales to wholesale customers were negatively impacted by supply chain and transportation delays.
•Gross profit increased $25.1 million, or 6.5%, to $408.8 million in the third quarter of fiscal 2021. Gross margin increased 150 basis points (“bps”) to 45.9% in the third quarter of fiscal 2021, primarily driven by increased average selling prices per unit as a result of decreased promotions. We are experiencing some COVID-19 related headwinds which have caused supply chain delays, including delays in the receipt of our product at factories and at ports, and an increase in inbound transportation and inbound freight costs. These increased inbound freight costs include $15.7 million and $25.6 million in air freight, primarily related to our U.S. Wholesale segment, for the third quarter and the first three quarters of fiscal 2021, respectively. These headwinds are expected to adversely impact our financial results for the fourth quarter of fiscal 2021 as we expect increased spending to expedite shipments from Asia to mitigate in part pandemic-related delays in production, as we aim to meet customer demand for our products.
•Selling, general and administrative (“SG&A”) expenses as a percentage of total net sales (“SG&A rate”) increased 60 bps to 32.9% for the third quarter of fiscal 2021. The increase in the SG&A rate was primarily driven by increased performance-based compensation expense, partially offset by decreased costs associated with the COVID-19 pandemic.
•Operating income increased $10.5 million to $124.0 million in the third quarter of fiscal 2021, primarily due to the factors discussed above.
•Net income increased $3.7 million, or 4.6%, to $85.0 million in the third quarter of fiscal 2021, primarily due to the factors discussed above and the tax impacts of each quarter.
•Diluted net income per common share increased from $1.85 to $1.93 in the third quarter of fiscal 2021.
•Inventories at October 2, 2021 increased $75.8 million, or 11.7%, to $722.4 million primarily due to increased in-transit inventory due to delays in the production and transportation of our products.
•Net cash provided by operating activities decreased $311.4 million in the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020 primarily due to a decrease in vendor payment terms.
•In the third quarter of fiscal 2021, we reinstated our common stock repurchase program. As a result, we returned $127.8 million to our shareholders in the third quarter of fiscal 2021, comprised of $110.3 million in share repurchases, as well as $17.5 million in cash dividends.
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
THIRD FISCAL QUARTER ENDED OCTOBER 2, 2021 COMPARED TO THIRD FISCAL QUARTER ENDED SEPTEMBER 26, 2020
The following table summarizes our results of operations. All percentages shown in the below table and the discussion that follows have been calculated using unrounded numbers.
Fiscal quarter ended | |||||||||||||||||||||||
| (dollars in thousands, except per share data) | October 2, 2021 | September 26, 2020 | $ Change | % / bps Change | |||||||||||||||||||
| Consolidated net sales | $ | 890,586 | $ | 865,080 | $ | 25,506 | 2.9 | % | |||||||||||||||
| Cost of goods sold | 481,298 | 483,333 | (2,035) | (0.4) | % | ||||||||||||||||||
| Adverse purchase commitments (inventory and raw materials), net | 507 | (1,968) | 2,475 | nm | |||||||||||||||||||
| Gross profit | 408,781 | 383,715 | 25,066 | 6.5 | % | ||||||||||||||||||
| Gross profit as % of consolidated net sales | 45.9 | % | 44.4 | % | 150 bps | ||||||||||||||||||
| Royalty income, net | 8,442 | 9,063 | (621) | (6.9) | % | ||||||||||||||||||
| Royalty income as % of consolidated net sales | 0.9 | % | 1.0 | % | (10) bps | ||||||||||||||||||
| Selling, general, and administrative expenses | 293,192 | 279,251 | 13,941 | 5.0 | % | ||||||||||||||||||
| SG&A expenses as % of consolidated net sales | 32.9 | % | 32.3 | % | 60 bps | ||||||||||||||||||
| Operating income | 124,031 | 113,527 | 10,504 | 9.3 | % | ||||||||||||||||||
| Operating income as % of consolidated net sales | 13.9 | % | 13.1 | % | 80 bps | ||||||||||||||||||
| Interest expense | 15,196 | 16,347 | (1,151) | (7.0) | % | ||||||||||||||||||
| Interest income | (335) | (330) | (5) | 1.5 | % | ||||||||||||||||||
| Other expense (income), net | 844 | (2,758) | 3,602 | nm | |||||||||||||||||||
| Income before income taxes | 108,326 | 100,268 | 8,058 | 8.0 | % | ||||||||||||||||||
| Income tax provision | 23,350 | 19,027 | 4,323 | 22.7 | % | ||||||||||||||||||
Effective tax rate(*) | 21.6 | % | 19.0 | % | 260 bps | ||||||||||||||||||
| Net income | $ | 84,976 | $ | 81,241 | $ | 3,735 | 4.6 | % | |||||||||||||||
| Basic net income per common share | $ | 1.94 | $ | 1.86 | $ | 0.08 | 4.3 | % | |||||||||||||||
| Diluted net income per common share | $ | 1.93 | $ | 1.85 | $ | 0.08 | 4.3 | % | |||||||||||||||
| Dividend declared and paid per common share | $ | 0.40 | $ | — | $ | 0.40 | nm | ||||||||||||||||
(*)Effective tax rate is calculated by dividing the provision for income taxes by income before income taxes.
Note: Results may not be additive due to rounding. Percentage changes that are not considered meaningful are denoted with “nm”.
Consolidated Net Sales
Consolidated net sales increased $25.5 million, or 2.9%, to $890.6 million in the third quarter of fiscal 2021. This increase was primarily driven by increased retail store traffic, increased demand with our international wholesale partners as these partners recovered from business disruptions as a result of COVID-19, expansion of our omni-channel programs, and increased average selling prices per unit due to decreased promotions, partially offset by decreased net sales to certain of our wholesale customers as a result of supply chain and transportation delays. We believe that this increase in retail store traffic was driven by progress in vaccinations, easing restrictions related to COVID-19, the passage of pandemic relief legislation in March 2021, including enhanced child tax credits, and a return to in-person classes driving back-to-school sales. Changes in foreign currency exchange rates used for translation in the third quarter of fiscal 2021, as compared to the third quarter of fiscal 2020, had a $5.6 million favorable effect on our consolidated net sales.
Gross Profit and Gross Margin
Our consolidated gross profit increased $25.1 million, or 6.5%, to $408.8 million in the third quarter of fiscal 2021. Consolidated gross margin increased 150 bps to 45.9% in the third quarter of fiscal 2021.
Gross profit is calculated as consolidated net sales less cost of goods sold less adverse purchase commitments, net, and gross margin is calculated as gross profit divided by consolidated net sales. Cost of goods sold include expenses related to the merchandising, design, and procurement of product, including inbound freight costs, purchasing and receiving costs, and inspection costs. Also included in costs of goods sold are the costs of shipping eCommerce product to end consumers. Retail
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
store occupancy costs, distribution expenses, and generally all other expenses other than interest and income taxes are included in SG&A. Distribution expenses that are included in SG&A primarily consist of payments to third-party shippers and handling costs to process product through our distribution facilities, including eCommerce fulfillment costs, and delivery to our wholesale customers and to our retail stores. Accordingly, our gross profit and gross margin may not be comparable to other entities that define their metrics differently.
The increase in consolidated gross profit and gross margin was primarily driven by higher consolidated net sales in our U.S. Retail and International segments and increased average selling prices per unit as a result of decreased promotions, partially offset by increased inbound transportation and inbound freight costs as a result of supply chain delays and a release of inventory related reserves in the third quarter of fiscal 2020 that did not reoccur in the third quarter of fiscal 2021.
Selling, General, and Administrative Expenses
Consolidated SG&A expenses increased $13.9 million, or 5.0%, to $293.2 million in the third quarter of fiscal 2021 and increased as a percentage of consolidated net sales by approximately 60 bps to 32.9%. This increase in SG&A rate was primarily driven by increased performance-based compensation expense and increased marketing expense, partially offset by decreased costs associated with the COVID-19 pandemic, decreased retail store rent expense due to store closures, impairment charges on operating leases assets in the third quarter of fiscal 2020 that did not reoccur in the third quarter of fiscal 2021, and decreased organizational restructuring charges.
Operating Income
Consolidated operating income increased $10.5 million, or 9.3%, to $124.0 million in the third quarter of fiscal 2021 and increased as a percentage of net sales by approximately 80 bps to 13.9%, primarily due to the factors discussed above.
Interest Expense
Interest expense decreased $1.2 million, or 7.0%, to $15.2 million in the third quarter of fiscal 2021. Weighted-average borrowings for the third quarter of fiscal 2021 were $1.00 billion at an effective interest rate of 6.00%, compared to weighted-average borrowings for the third quarter of fiscal 2020 of $1.24 billion at an effective interest rate of 5.25%.
The decrease in weighted-average borrowings during the third quarter of fiscal 2021 was attributable to the absence of borrowings under our secured revolving credit facility during the third quarter of fiscal 2021. We repaid the outstanding borrowings under our secured revolving credit facility at the end of the third quarter of fiscal 2020. The increase in the effective interest rate for the third quarter of fiscal 2021 was primarily due to the absence of borrowings under our secured revolving credit facility, which bore a lower interest rate than our senior notes, during the third quarter of fiscal 2021.
Other Expense (Income), Net
Other expense, net was $0.8 million in the third quarter of fiscal 2021 compared to other income, net of $2.8 million in the third quarter of fiscal 2020, primarily due to the year over year impact of changes in the foreign currency exchange rates of the Canadian dollar.
Income Taxes
Our consolidated income tax provision increased $4.3 million, or 22.7%, to $23.4 million in the third quarter of fiscal 2021. Our effective tax rate was 21.6% in the third quarter of fiscal 2021 compared to 19.0% in the third quarter of fiscal 2020. The effective tax rate for the third quarter of fiscal 2021 reflects our full year expectations regarding the components of our taxable income by jurisdiction, with the majority of the income earned in the U.S. under existing U.S. tax legislation.
Net Income
Our consolidated net income increased $3.7 million, or 4.6%, to $85.0 million in the third quarter of fiscal 2021. This increase was due to the factors previously discussed.
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results by Segment - Third Quarter of Fiscal 2021 compared to Third Quarter of Fiscal 2020
The following table summarizes net sales and operating income, by segment, for the third quarter of fiscal 2021 and the third quarter of fiscal 2020:
| Fiscal quarter ended | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | October 2, 2021 | % of consolidated net sales | September 26, 2020 | % of consolidated net sales | $ Change | % Change | |||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||
| U.S. Retail | $ | 465,711 | 52.3 | % | $ | 449,150 | 51.9 | % | $ | 16,561 | 3.7 | % | |||||||||||||||||||||||
| U.S. Wholesale | 294,180 | 33.0 | % | 302,135 | 34.9 | % | (7,955) | (2.6) | % | ||||||||||||||||||||||||||
| International | 130,695 | 14.7 | % | 113,795 | 13.2 | % | 16,900 | 14.9 | % | ||||||||||||||||||||||||||
| Consolidated net sales | $ | 890,586 | 100.0 | % | $ | 865,080 | 100.0 | % | $ | 25,506 | 2.9 | % | |||||||||||||||||||||||
| Operating income: | % of segment net sales | % of segment net sales | |||||||||||||||||||||||||||||||||
| U.S. Retail | $ | 87,151 | 18.7 | % | $ | 47,559 | 10.6 | % | $ | 39,592 | 83.2 | % | |||||||||||||||||||||||
| U.S. Wholesale | 40,074 | 13.6 | % | 65,718 | 21.8 | % | (25,644) | (39.0) | % | ||||||||||||||||||||||||||
| International | 22,754 | 17.4 | % | 17,400 | 15.3 | % | 5,354 | 30.8 | % | ||||||||||||||||||||||||||
| Unallocated corporate expenses | (25,948) | n/a | (17,150) | n/a | (8,798) | 51.3 | % | ||||||||||||||||||||||||||||
| Consolidated operating income | $ | 124,031 | 13.9 | % | $ | 113,527 | 13.1 | % | $ | 10,504 | 9.3 | % | |||||||||||||||||||||||
Comparable Sales Metrics
We are including in our management's discussion and analysis for the third quarter of fiscal 2021 comparable sales metrics for our company-owned retail stores and our eCommerce sites in our U.S. Retail and International segments.
Our comparable store sales metrics include sales for all stores and eCommerce sites that were open and operated by us during the comparable fiscal period, including stand-alone format stores that converted to multi-branded format stores and certain remodeled or relocated stores. A store or site becomes comparable following 13 consecutive full fiscal months of operations. If a store relocates within the same center with no business interruption or material change in square footage, the sales of such store will continue to be included in the comparable store metrics. If a store relocates to another center, or there is a material change in square footage, such store is treated as a new store. Stores that are closed during the relevant fiscal period are included in the comparable store sales metrics up to the last full fiscal month of operations.
The method of calculating sales metrics varies across the retail industry. As a result, our comparable sales metrics may not be comparable to those of other retailers.
U.S. Retail
U.S. Retail segment net sales increased $16.6 million, or 3.7%, to $465.7 million in the third quarter of fiscal 2021. The increase in net sales was primarily driven by increased average selling prices per unit as a result of decreased promotions, partially offset by permanent retail store closures. Comparable net sales, including retail stores and eCommerce, increased 5.9% during the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020 primarily driven by increased average selling prices per unit. As of October 2, 2021, we operated 755 retail stores in the U.S. compared to 864 as of January 2, 2021 and 863, of which 854 were open, as of September 26, 2020. The decrease in store count in the third quarter of fiscal 2021 reflects progress against our previously announced plans to close over 100 retail stores that are primarily less profitable and in less trafficked shopping centers, by the end of fiscal 2021.
U.S. Retail segment operating income increased $39.6 million, or 83.2%, to $87.2 million in the third quarter of fiscal 2021. Operating margin increased 810 bps to 18.7% in the third quarter of fiscal 2021. The primary drivers of the increase in operating margin were a 680 bps increase in gross margin, a 40 bps decrease in royalty income, and a 160 bps decrease in SG&A rate. The increase in gross margin was primarily due to increased average selling prices per unit. The decrease in royalty income was primarily due to supply chain and transportation delays. The decrease in the SG&A rate was primarily due to decreased retail store rent expense due to store closures, decreased COVID-19 related charges, and impairment charges on operating lease assets in the third quarter of fiscal 2020 that did not reoccur in the third quarter of fiscal 2021, partially offset by increased performance-based compensation expense.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
U.S. Wholesale
U.S. Wholesale segment net sales decreased $8.0 million, or 2.6%, to $294.2 million in the third quarter of fiscal 2021 primarily due to supply chain and transportation delays, partially offset by increased demand for our exclusive brands.
U.S. Wholesale segment operating income decreased $25.6 million, or 39.0%, to $40.1 million in the third quarter of fiscal 2021. Operating margin decreased 820 bps to 13.6% in the third quarter of fiscal 2021. The primary drivers of the decrease in operating margin were a 830 bps decrease in gross margin, a 50 bps increase in royalty income, and a 30 bps increase in the SG&A rate. The decrease in gross margin was primarily due to increased inbound transportation and inbound freight costs and a release of inventory related reserves and adverse purchase commitment reserves in the third quarter of fiscal 2020 that did not reoccur in the third quarter of fiscal 2021. The increase in royalty income was primarily due to increased licensee sales volumes as our licensees recovered from business disruptions related to COVID-19. The increase in the SG&A rate was primarily due to decreased sales, increased performance-based compensation expense, increased distribution and freight costs, and increased marketing expense, partially offset by decreased bad debt expense and decreased COVID-19 related charges.
International
International segment net sales increased $16.9 million, or 14.9%, to $130.7 million in the third quarter of fiscal 2021. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Canadian dollar, had a $5.6 million favorable effect on International segment net sales in the third quarter of fiscal 2021. The increase in net sales was primarily driven by increased sales to our international wholesale partners as these partners recovered from business disruptions as a result of COVID-19, and growth in our Canadian eCommerce business, which has benefited from the introduction of omni-channel initiatives, partially offset by decreased sales to certain Canadian and Mexican wholesale customers as a result of supply chain and transportation delays.
Canadian comparable retail net sales, including retail stores and eCommerce, increased 2.6% during the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020, primarily due to growth in Canadian eCommerce. As of October 2, 2021, we operated 188 stores and 41 stores in Canada and Mexico, respectively. As of January 2, 2021, we operated 193 stores in Canada, of which 60 were open, and 44 stores in Mexico, of which 16 were open. As of September 26, 2020, we operated 196 stores in Canada and 44 stores in Mexico.
International segment operating income increased $5.4 million, or 30.8%, to $22.8 million in the third quarter of fiscal 2021. Operating margin increased 210 bps to 17.4% in the third quarter of fiscal 2021. The increase in the operating margin was primarily attributable to a 290 bps increase in gross margin, a 50 bps decrease in royalty income, and a 30 bps increase in the SG&A rate. The increase in gross margin was primarily due to increased average selling prices per unit, partially offset by a release of inventory related reserves in the third quarter of fiscal 2020 that did not reoccur in the third quarter of fiscal 2021. The decrease in royalty income was primarily due to supply chain and transportation delays. The increase in the SG&A rate was primarily due to increased performance-based compensation expense, and increased distribution and freight costs, partially offset by better leverage of retail store expenses due to increased store traffic, better leverage of costs through our new omni-channel programs in Canada, and other reductions in spending.
Unallocated Corporate Expenses
Unallocated corporate expenses increased $8.8 million, or 51.3%, to $25.9 million in the third quarter of fiscal 2021. Unallocated corporate expenses, as a percentage of consolidated net sales, increased 90 bps to 2.9% in the third quarter of fiscal 2021. The increase as a percentage of consolidated net sales was primarily due to increased performance-based compensation expense.
23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
THREE FISCAL QUARTERS ENDED OCTOBER 2, 2021 COMPARED TO THREE FISCAL QUARTERS ENDED SEPTEMBER 26, 2020
The following table summarizes our results of operations. All percentages shown in the below table and the discussion that follows have been calculated using unrounded numbers.
| Three fiscal quarters ended | |||||||||||||||||||||||
| (dollars in thousands, except per share data) | October 2, 2021 | September 26, 2020 | $ Change | % / bps Change | |||||||||||||||||||
| Consolidated net sales | $ | 2,424,347 | $ | 2,034,437 | $ | 389,910 | 19.2 | % | |||||||||||||||
| Cost of goods sold | 1,262,822 | 1,170,778 | 92,044 | 7.9 | % | ||||||||||||||||||
| Adverse purchase commitments (inventory and raw materials), net | (7,923) | 16,166 | (24,089) | nm | |||||||||||||||||||
| Gross profit | 1,169,448 | 847,493 | 321,955 | 38.0 | % | ||||||||||||||||||
| Gross profit as % of consolidated net sales | 48.2 | % | 41.7 | % | 650 bps | ||||||||||||||||||
| Royalty income, net | 22,550 | 19,989 | 2,561 | 12.8 | % | ||||||||||||||||||
| Royalty income as % of consolidated net sales | 0.9 | % | 1.0 | % | (10) bps | ||||||||||||||||||
| Selling, general, and administrative expenses | 832,889 | 767,237 | 65,652 | 8.6 | % | ||||||||||||||||||
| SG&A expenses as % of consolidated net sales | 34.4 | % | 37.7 | % | (330) bps | ||||||||||||||||||
| Goodwill impairment | — | 17,742 | (17,742) | nm | |||||||||||||||||||
| Intangible asset impairment | — | 26,500 | (26,500) | nm | |||||||||||||||||||
| Operating income | 359,109 | 56,003 | 303,106 | >100% | |||||||||||||||||||
| Operating income as % of consolidated net sales | 14.8 | % | 2.8 | % | 1,200 bps | ||||||||||||||||||
| Interest expense | 45,839 | 40,523 | 5,316 | 13.1 | % | ||||||||||||||||||
| Interest income | (761) | (1,217) | 456 | (37.5) | % | ||||||||||||||||||
| Other (income) expense, net | (796) | 2,647 | (3,443) | nm | |||||||||||||||||||
| Income before income taxes | 314,827 | 14,050 | 300,777 | >100% | |||||||||||||||||||
| Provision for income taxes | 72,052 | 3,347 | 68,705 | >100% | |||||||||||||||||||
Effective tax rate(*) | 22.9 | % | 23.8 | % | (90) bps | ||||||||||||||||||
| Net income | $ | 242,775 | $ | 10,703 | $ | 232,072 | >100% | ||||||||||||||||
| Basic net income per common share | $ | 5.53 | $ | 0.25 | $ | 5.28 | >100% | ||||||||||||||||
| Diluted net income per common share | $ | 5.51 | $ | 0.24 | $ | 5.27 | >100% | ||||||||||||||||
| Dividend declared and paid per common share | $ | 0.80 | $ | 0.60 | $ | 0.20 | (33.3) | % | |||||||||||||||
(*)Effective tax rate is calculated by dividing the provision for income taxes by income before income taxes.
Note: Results may not be additive due to rounding. Percentage changes that are not considered meaningful are denoted with “nm”.
Consolidated Net Sales
Consolidated net sales increased $389.9 million, or 19.2%, to $2.42 billion in the first three quarters of fiscal 2021. This increase was primarily driven by increased retail store traffic, increased demand with many of our wholesale customers, increased demand with our international wholesale partners as these partners began to recover from business disruptions as a result of COVID-19, and increased average selling prices per unit, partially offset by decreased net sales through our domestic eCommerce channel. We believe that this increase in demand was driven by progress in vaccinations, easing restrictions related to COVID-19, the passage of pandemic relief legislation in March 2021, including enhanced child tax credits, strong consumer reaction to our product offerings, and a return to in-person classes driving back-to-school sales. The first three quarters of fiscal 2020 were adversely impacted by the closure of our retail stores in March, April, and May 2020 and reduced demand in our other businesses as a result of disruptions related to COVID-19. Changes in foreign currency exchange rates used for translation in the first three quarters of fiscal 2021, as compared to the first three quarters of fiscal 2020, had a $16.8 million favorable effect on our consolidated net sales.
Gross Profit and Gross Margin
Our consolidated gross profit increased $322.0 million, or 38.0%, to $1.17 billion in the first three quarters of fiscal 2021. Consolidated gross margin increased 650 bps to 48.2% in the first three quarters of fiscal 2021.
24
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The increase in consolidated gross profit and gross margin was primarily driven by higher consolidated net sales across our businesses segments, increased average selling prices per unit, decreased product costs, decreased excess inventory provisions and a release of adverse purchase commitments related to better than expected sales of inventory and utilization of fabric that were reserved for in the first quarter of fiscal 2020, partially offset by increased inbound transportation and inbound freight costs. Gross margin in the first three quarters of fiscal 2020 was adversely impacted by incremental inventory related charges of $40.0 million, inclusive of $16.2 million in adverse inventory and fabric purchase commitments, primarily from disruptions related to COVID-19.
Royalty Income
Royalty income increased $2.6 million, or 12.8%, to $22.6 million in the first three quarters of fiscal 2021, primarily due to increased licensee sales volume as our licensees recovered from business disruptions related to COVID-19.
Selling, General, and Administrative Expenses
Consolidated SG&A expenses increased $65.7 million, or 8.6%, to $832.9 million in the first three quarters of fiscal 2021 and decreased as a percentage of consolidated net sales by approximately 330 bps to 34.4%. This decrease as a percentage of consolidated net sales was primarily driven by increased consolidated net sales, decreased eCommerce fulfillment costs, better leverage of retail store expenses as more sales shifted back to the retail stores due to more stores being open throughout the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020, decreased organizational restructuring charges, decreased costs associated with the COVID-19 pandemic, and decreased impairment charges on operating lease assets, partially offset by increased performance-based compensation expense.
Goodwill Impairment
During the first quarter of fiscal 2020, the Company’s market capitalization declined, and actual and projected sales and profitability decreased as a result of disruptions related to COVID-19. Based on these events, we concluded that a triggering event occurred, and we performed an interim quantitative impairment test as of March 28, 2020. Based upon the results of the impairment test, we recognized a goodwill impairment charge of $17.7 million during the first quarter of fiscal 2020 which was recorded to the Other International reporting unit in the International segment. This charge did not reoccur in the first three quarters of fiscal 2021.
Intangible Asset Impairment
In the first quarter of fiscal 2020, the Company recorded non-cash impairment charges of $15.5 million and $11.0 million related to its OshKosh and Skip Hop tradename assets recorded in connection with the acquisition of OshKosh B’Gosh, Inc. in July 2005 and Skip Hop Holdings, Inc. in February 2017, respectively. The impairment reflected lower-than-expected actual sales, and lower projected sales and profitability due to decreased demand as a result of disruptions related to COVID-19. This charge did not reoccur in the first three quarters of fiscal 2021.
Operating Income
Consolidated operating income increased $303.1 million to $359.1 million in the first three quarters of fiscal 2021. Consolidated operating margin increased 1,200 bps to 14.8% in the first three quarters of fiscal 2021 primarily due to the factors discussed above.
Interest Expense
Interest expense increased $5.3 million, or 13.1%, to $45.8 million in the first three quarters of fiscal 2021. Weighted-average borrowings for the first three quarters of fiscal 2021 were $1.00 billion at an effective interest rate of 6.03%, compared to weighted-average borrowings for the first three quarters of fiscal 2020 of $1.04 billion at an effective interest rate of 5.10%.
The decrease in weighted-average borrowings during the first three quarters of fiscal 2021 was attributable to the absence of borrowings under our secured revolving credit facility during the first three quarters of 2021, partially offset by the issuance of $500 million in principal amount of senior notes in May 2020. The increase in the effective interest rate for the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020 was primarily due to the absence of borrowings under our secured revolving credit facility, which bore a lower interest rate than our senior notes, during the first three quarters of fiscal 2021.
Other (Income) Expense, Net
Other income, net was $0.8 million in the first three quarters of fiscal 2021 compared to other expense, net of $2.6 million in the first three quarters of fiscal 2020. This difference was primarily due to a foreign exchange loss on intercompany loans in the
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
first three quarters of fiscal 2020 related to the strengthening of the U.S. dollar that did not reoccur in the first three quarters of fiscal 2021.
Income Taxes
Our consolidated income tax provision increased $68.7 million to $72.1 million in the first three quarters of fiscal 2021. Our effective tax rate was 22.9% in the first three quarters of fiscal 2021 compared to 23.8% in the first three quarters of fiscal 2020. The effective tax rate for first three quarters of fiscal 2021 reflects our full year expectations regarding the components of our taxable income by jurisdiction, with the majority of the income earned in the U.S. under existing U.S. tax legislation. The effective tax rate for the first three quarters of fiscal 2020 primarily reflected a year-to-date adjustment in forecasted earnings in the United States at the end of the third quarter of fiscal 2020 that was greater than what was expected at the second quarter of fiscal 2020 and the impact of goodwill impairments in the first quarter of fiscal 2020 with no corresponding tax benefit.
Net Income
Consolidated net income increased $232.1 million to $242.8 million in the first three quarters of fiscal 2021, primarily due to the factors previously discussed.
Results by Segment - First Three Quarters of Fiscal 2021 compared to First Three Quarters of Fiscal 2020
The following table summarizes net sales and operating income, by segment, for the first three quarters of fiscal 2021 and fiscal 2020:
| Three fiscal quarters ended | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | October 2, 2021 | % of consolidated net sales | September 26, 2020 | % of consolidated net sales | $ Change | % Change | |||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||
| U.S. Retail | $ | 1,296,405 | 53.5 | % | $ | 1,085,883 | 53.4 | % | $ | 210,522 | 19.4 | % | |||||||||||||||||||||||
| U.S. Wholesale | 809,186 | 33.4 | % | 706,009 | 34.7 | % | 103,177 | 14.6 | % | ||||||||||||||||||||||||||
| International | 318,756 | 13.1 | % | 242,545 | 11.9 | % | 76,211 | 31.4 | % | ||||||||||||||||||||||||||
| Consolidated net sales | $ | 2,424,347 | 100.0 | % | $ | 2,034,437 | 100.0 | % | $ | 389,910 | 19.2 | % | |||||||||||||||||||||||
| Operating income (loss): | % of segment net sales | % of segment net sales | |||||||||||||||||||||||||||||||||
| U.S. Retail | $ | 250,751 | 19.3 | % | $ | 38,902 | 3.6 | % | $ | 211,849 | >100% | ||||||||||||||||||||||||
| U.S. Wholesale | 150,724 | 18.6 | % | 89,141 | 12.6 | % | 61,583 | 69.1 | % | ||||||||||||||||||||||||||
| International | 41,495 | 13.0 | % | (15,819) | (6.5) | % | 57,314 | >100% | |||||||||||||||||||||||||||
| Unallocated corporate expenses | (83,861) | n/a | (56,221) | n/a | (27,640) | 49.2 | % | ||||||||||||||||||||||||||||
| Consolidated operating income | $ | 359,109 | 14.8 | % | $ | 56,003 | 2.8 | % | $ | 303,106 | >100% | ||||||||||||||||||||||||
Comparable Sales Metrics
As a result of the temporary store closures in the first three quarters of fiscal 2020 in response to COVID-19, we have not included a discussion of the first three quarters of fiscal 2021 retail comparable sales as we do not believe it is a meaningful metric during the period.
U.S. Retail
U.S. Retail segment net sales increased $210.5 million, or 19.4%, to $1.30 billion in the first three quarters of fiscal 2021. The increase in net sales was primarily driven by increased retail store traffic due to more stores being open throughout the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020 and increased average selling prices per unit as a result of decreased promotions, partially offset by decreased net sales through our eCommerce channel as more sales shifted back to the retail stores as a result of more stores being open throughout the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020, as well as permanent retail store closures.
U.S. Retail segment operating income increased $211.8 million to $250.8 million in the first three quarters of fiscal 2021. Operating margin increased 1,570 bps to 19.3% in the first three quarters of fiscal 2021. Operating income in the first three
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
quarters of fiscal 2020 included intangible asset impairment charges of $13.6 million and $0.5 million related to the OshKosh and Skip Hop tradenames, respectively. The primary drivers of the increase in operating margin were a 860 bps increase in gross margin, a 600 bps decrease in SG&A rate, and the intangible asset impairment charges in the first three quarters of fiscal 2020 that did not reoccur in the first three quarters of fiscal 2021. The increase in gross margin was primarily due to increased average selling prices per unit, decreased product costs, decreased inventory provisions, and decreased fabric purchases commitment charges. The decrease in the SG&A rate was primarily due to increased net sales, better leverage of retail store expenses due to increased store traffic, decreased COVID-19 related charges, impairment charges on operating lease assets in the first three quarters of fiscal 2020 that did not reoccur in the first three quarters of fiscal 2021, and decreased organizational restructuring expenses, partially offset by increased performance-based compensation expense and increased distribution costs.
U.S. Wholesale
U.S. Wholesale segment net sales increased $103.2 million, or 14.6%, to $809.2 million in the first three quarters of fiscal 2021 primarily due to increased demand in our Carter’s brands, including our exclusive Carter’s brands, and increased average selling prices per unit.
U.S. Wholesale segment operating income increased $61.6 million, or 69.1%, to $150.7 million in the first three quarters of fiscal 2021. Operating margin increased 600 bps to 18.6% in the first three quarters of fiscal 2021. Operating income in the first three quarters of fiscal 2020 included intangible asset impairment charges of $6.8 million and $1.6 million related to the Skip Hop and OshKosh tradenames, respectively. The primary drivers of the increase in operating margin were a 280 bps increase in gross margin, a 180 bps decrease in SG&A rate, and the intangible asset impairment charges in the first three quarters of fiscal 2020 that did not reoccur in the first three quarters of fiscal 2021. The increase in gross margin was primarily due to decreased inventory provisions and a release of adverse purchase commitment reserves related to better than expected sales of inventory and utilization of fabric that were reserved for in the first three quarters of fiscal 2020, increased average selling prices per unit, customer mix, and decreased product costs, partially offset by increased inbound transportation and inbound freight costs. The decrease in the SG&A rate was primarily due to increased sales, decreased COVID-19 related charges, better leverage of fixed distribution costs, and decreased bad debt expense, partially offset by increased performance-based compensation expense and marketing expense.
International
International segment net sales increased $76.2 million, or 31.4%, to $318.8 million in the first three quarters of fiscal 2021. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Canadian dollar, had a $16.8 million favorable effect on International segment net sales in the first three quarters of fiscal 2021. The increase in net sales was primarily driven by increased sales to our international partners, increased retail store traffic in Canada and Mexico due to more stores being open throughout the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020 as the Company recovered from business disruptions related to COVID-19, and growth in our Canadian eCommerce business due to increased demand and the introduction of omni-channel initiatives.
International segment operating income was $41.5 million in the first three quarters of fiscal 2021 compared to an operating loss of $15.8 million in the first three quarters of fiscal 2020. Operating margin increased 1,950 bps to 13.0% in the first three quarters of fiscal 2021. Operating loss in the first three quarters of fiscal 2020 included a $17.7 million goodwill impairment charge recorded to the Other International reporting unit, a $3.7 million intangible asset impairment charge related to the Skip Hop tradename, and a $0.3 million intangible asset impairment charge related to the OshKosh tradename. The increase in the operating margin was primarily attributable to the goodwill and intangible asset impairment charges in the first three quarters of fiscal 2020 that did not reoccur in the first three quarters of fiscal 2021, a 640 bps increase in gross margin, and a 440 bps decrease in the SG&A rate. The increase in gross margin was primarily due to decreased inventory provisions and a release of adverse purchase commitment reserves related to better than expected sales of inventory and utilization of fabric that were reserved for in the first quarters of fiscal 2020. The decrease in the SG&A rate was primarily due to increased net sales, better leverage of retail store expenses due to increased store traffic, and decreased COVID-19 related charges, partially offset by increased performance-based compensation expense.
Unallocated Corporate Expenses
Unallocated corporate expenses increased $27.6 million, or 49.2%, to $83.9 million in the first three quarters of fiscal 2021. Unallocated corporate expenses, as a percentage of consolidated net sales, increased 70 bps to 3.5% in the first three quarters of fiscal 2021. The increase as a percentage of consolidated net sales primarily due to increased performance-based compensation expense, partially offset by increased net sales.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY
Our ongoing cash needs are primarily for working capital and capital expenditures. We expect that our primary sources of liquidity will be cash and cash equivalents on hand, cash flow from operations, and available borrowing capacity under our secured revolving credit facility. These sources of liquidity may be affected by events described in our risk factors, as further discussed under the heading “Risk Factors” in our most recently filed Annual Report on Form 10-K and in other reports filed with the Securities and Exchange Commission from time to time.
We are experiencing some COVID-19 related headwinds which have caused supply chain delays, including delays in the receipt of our product at factories and at ports, and an increase in inbound transportation and inbound freight costs. These costs increased air freight charges to expedite the shipment of delayed products to our customers. These headwinds are expected to adversely impact our financial results for the fourth quarter of fiscal 2021 as we expect increased spending to expedite shipments from Asia to mitigate in part pandemic-related delays in production, as we aim to meet customer demand for our products.
As of October 2, 2021, the Company had $943.0 million of cash and cash equivalents at major financial institutions, including approximately $113.7 million held at financial institutions located outside of the United States. We maintain cash deposits with major financial institutions that exceed the insurance coverage limits provided by the Federal Deposit Insurance Corporation in the United States and by similar insurers for deposits located outside the United States. To mitigate this risk, we utilize a policy of allocating cash deposits among major financial institutions that have been evaluated by us and third-party rating agencies as having acceptable risk profiles.
Balance Sheet
Net accounts receivable at October 2, 2021 were $261.2 million compared to $263.2 million at September 26, 2020 and $186.5 million at January 2, 2021. The overall decrease of $2.0 million, or 0.8%, at October 2, 2021 compared to September 26, 2020 primarily reflects improved days sales outstanding, partially offset by increased customer demand. Due to the seasonal nature of our operations, the net accounts receivable balance at October 2, 2021 is not comparable to the net accounts receivable balance at January 2, 2021.
Inventories at October 2, 2021 were $722.4 million compared to $646.6 million at September 26, 2020 and $599.3 million at January 2, 2021. The increase of $75.8 million, or 11.7%, at October 2, 2021 compared to September 26, 2020 is primarily due to increased in-transit inventory due to delays in production and transportation of our products. Due to the seasonal nature of our operations, the inventories balance at October 2, 2021 is not comparable to the inventories balance at January 2, 2021.
Accounts payable at October 2, 2021 were $388.7 million compared to $473.5 million at September 26, 2020 and $472.1 million at January 2, 2021. The decrease of $84.7 million, or 17.9%, at October 2, 2021 compared to September 26, 2020 is primarily due to the timing of cash payments and change in payment terms to certain of our vendors. Due to the seasonal nature of our operations, the accounts payable balance at October 2, 2021 is not comparable to the accounts payable balance at January 2, 2021.
Cash Flow
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the first three quarters of fiscal 2021 was $7.3 million compared to net cash provided by operating activities of $318.7 million in the first three quarters of fiscal 2020. Our cash flow provided by operating activities is driven by net income and changes in our working capital. The decrease in net cash provided by operating activities for the first three quarters of fiscal 2021 was primarily due to a decrease in vendor payment terms and payments of deferred retail store rents from fiscal 2020, partially offset by increased profitability. While payment terms decreased in fiscal 2021, they still remain longer than our historic pre-COVID-19 terms.
Net Cash Used in Investing Activities
Net cash used in investing activities was $23.7 million for the first three quarters of fiscal 2021 compared to $23.8 million in the first three quarters of fiscal 2020. The decrease in net cash used in investing activities for the first three quarters of fiscal 2021 is primarily due to increased proceeds from sales of investments in marketable securities, partially offset by an increase in capital expenditures. Capital expenditures in the first three quarters of fiscal 2021 primarily included $17.4 million for information technology initiatives, $7.2 million for omni-channel initiatives and our U.S. and international retail store openings and remodels, and $3.1 million for our distribution facilities.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
We plan to invest approximately $45 million in capital expenditures in fiscal 2021, which primarily relates to strategic information technology initiatives, U.S. and international retail store openings and remodels, investments to strengthen our omni-channel capabilities, and distribution facility initiatives.
Net Cash (Used in) Provided by Financing Activities
Net cash used in financing activities was $142.1 million in the first three quarters of fiscal 2021 compared to net cash provided by financing activities of $319.6 million used in the first three quarters of fiscal 2020. This change in cash flow from financing activities was primarily due to the issuance of $500 million in principal amount of senior notes in May 2020, which did not reoccur in the first three quarters of fiscal 2021, and an increase in the return of capital to our shareholders in the form of common stock share repurchases and cash dividends.
Financing cash flow for the fourth quarter of fiscal 2021 is expected to be impacted by the decision to reinstate our common stock repurchase program in the third quarter of fiscal 2021.
Secured Revolving Credit Facility
As of October 2, 2021, we had no outstanding borrowings under our secured revolving credit facility, exclusive of $4.4 million of outstanding letters of credit. As of October 2, 2021, there was approximately $745.6 million available for future borrowing. Any outstanding borrowings under our secured revolving credit facility are classified as non-current liabilities on our consolidated balance sheets due to contractual repayment terms under the credit facility. However, these repayment terms also allow us to repay some or all of the outstanding borrowings at any time.
On April 21, 2021, through our wholly owned subsidiary, The William Carter Company (“TWCC”), we entered into Amendment No. 3 to our fourth amended and restated credit agreement (“Amendment No. 3”). Among other things, Amendment No. 3 provides that through the remainder of the Restricted Period, which ends on the date the Company delivers its financial statements and associated certificates relating to the third fiscal quarter of 2021:
•we must maintain a minimum liquidity (defined as cash-on-hand plus availability under the secured revolving credit facility) on the last day of each fiscal month of at least $950 million (the “Revised Liquidity Requirement”), which was increased by $250 million from $700 million; and
•we may make additional restricted payments, including to pay cash dividends and repurchase common stock, in an amount not to exceed $250 million, provided that (a) no default or event of default will have occurred and be continuing or would result from the payment and (b) after giving effect to the payment, we would have been in compliance with Revised Liquidity Requirement as of the last day of the most recent month.
Approximately $0.2 million, including both bank fees and other third party expenses, has been capitalized in connection with Amendment No. 3 and is being amortized over the remaining term of the secured revolving credit facility.
As of October 2, 2021, the interest rate margins applicable to the secured revolving credit facility were 1.125% for LIBOR (London Interbank Offered Rate) rate loans and 0.125% for base rate loans.
As of October 2, 2021, the Company was in compliance with the financial and other covenants under the secured revolving credit facility.
Senior Notes
As of October 2, 2021, we had outstanding $500 million principal amount of senior notes, bearing interest at a rate of 5.625% per annum, and maturing on March 15, 2027, and $500 million principal amount of senior notes, bearing interest at a rate of 5.500% per annum, and maturing on May 15, 2025.
Share Repurchases
In the third quarter of fiscal 2021, we reinstated our common stock share repurchase program, which had been suspended in the first quarter of fiscal 2020 in connection with the COVID-19 pandemic. In the first three quarters of fiscal 2021, we repurchased and retired 1,095,899 shares in open market transactions for approximately $110.3 million, at an average price of $100.61 per share. Fiscal year-to-date through October 28, 2021, the Company repurchased and retired 1,941,598 shares in open market transactions for approximately $193.0 million, at an average price of $99.42 per share. In the first three quarters of fiscal 2020, we repurchased and retired 474,684 shares in open market transactions for approximately $45.3 million, at an average price of $95.34 per share.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The total remaining capacity under all remaining repurchase authorizations as of October 2, 2021 was approximately $540.2 million. Future repurchases may occur from time to time in the open market, in negotiated transactions, or otherwise. The timing and amount of any repurchases will be at the discretion of the Company subject to restrictions under the Company’s revolving credit facility, market conditions, stock price, other investment priorities, and other factors. The share repurchase authorizations have no expiration dates.
Dividends
On May 1, 2020, in connection with the COVID-19 pandemic, we suspended our quarterly cash dividend. As a result, we did not declare or pay cash dividends through April 27, 2021. In each of the second and third quarters of fiscal 2021, the Board of Directors declared and we paid quarterly cash dividends of $0.40 per common share.
In the first quarter of fiscal 2020, the Board of Directors declared and we paid cash dividends of $0.60 per common share. We did not declare or pay cash dividends in the second or third quarters of fiscal 2020.
Our Board of Directors will evaluate future dividend declarations based on a number of factors, including restrictions under our secured revolving credit facility, business conditions, our financial performance, and other considerations. Provisions in our secured revolving credit facility could have the effect of restricting our ability to pay cash dividends on, or make future repurchases of, our common stock, as further described in Note 8, Long-Term Debt to the consolidated financial statements.
Seasonality
We experience seasonal fluctuations in our sales and profitability due to the timing of certain holidays and key retail shopping periods, which generally has resulted in lower sales and gross profit in the first half of our fiscal year versus the second half of the fiscal year. Accordingly, our results of operations during the first half of the year may not be indicative of the results we expect for the full year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies and estimates are described under the heading “Critical Accounting Policies and Estimates” in Item 7 of our most recent Annual Report on Form 10-K for the 2020 fiscal year ended January 2, 2021. Our critical accounting policies and estimates are those policies that require management’s most difficult and subjective judgments and may result in the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include: revenue recognition and accounts receivable allowance, inventory, goodwill and tradename, accrued expenses, loss contingencies, accounting for income taxes, foreign currency, employee benefit plans, and stock-based compensation arrangements. There have been no material changes in these critical accounting policies and estimates from those described in our most recent Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency and Interest Rate Risks
In the operation of our business, we have market risk exposures including those related to foreign currency risk and interest rates. These risks, and our strategies to manage our exposure to them, are discussed below.
Currency Risk
We contract for production with third parties, primarily in Asia. While these contracts are stated in U.S. dollars, there can be no assurance that the cost for the future production of our products will not be affected by exchange rate fluctuations between the U.S. dollar and the local currencies of these contractors. Due to the number of currencies involved, we cannot quantify the potential impact that future currency fluctuations may have on our results of operations in future periods.
The financial statements of our foreign subsidiaries that are denominated in functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for
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revenues and expenses. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in accumulated other comprehensive income (loss).
Our foreign subsidiaries typically record sales denominated in currencies other than the U.S. dollar, which are then translated into U.S. dollars using weighted-average exchange rates. The changes in foreign currency exchange rates used for translation in the third quarter of fiscal 2021, as compared to the third quarter of fiscal 2020, had a $5.6 million favorable effect on our consolidated net sales. The changes in foreign currency exchange rates used for translation in the first three quarters of fiscal 2021, as compared to the first three quarters of fiscal 2020, had a $16.8 million favorable effect on our consolidated net sales.
Fluctuations in exchange rates between the U.S. dollar and other currencies may affect our results of operations, financial position, and cash flows. Transactions by our foreign subsidiaries may be denominated in a currency other than the entity's functional currency. Foreign currency transaction gains and losses also include the impact of intercompany loans with foreign subsidiaries that are marked to market. In our consolidated statement of operations, these gains and losses are recorded within Other expense (income), net. Foreign currency transaction gains and losses related to intercompany loans with foreign subsidiaries that are of a long-term nature are accounted for as translation adjustments and are included in Accumulated other comprehensive income (loss).
Interest Rate Risk
Our operating results are subject to risk from interest rate fluctuations on our amended secured revolving credit facility, which carries variable interest rates. As October 2, 2021, there were no variable rate borrowings outstanding under the amended secured revolving credit facility. As a result, the impact of a hypothetical 100 bps increase in the effective interest rate would not result in a material amount of additional interest expense over a 12-month period.
Other Risks
We enter into various purchase order commitments with our suppliers. We generally can cancel these arrangements, although in some instances we may be subject to a termination charge reflecting a percentage of work performed prior to cancellation.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of October 2, 2021.
Changes in Internal Control over Financial Reporting
The principal executive officer and principal financial officer also conducted an evaluation of the Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the fiscal quarter ended October 2, 2021 that have materially affected, or which are reasonably likely to materially affect, Internal Control.
There were no changes in the Company’s Internal Control that materially affected, or were likely to materially affect, such control over financial reporting during the fiscal quarter ended October 2, 2021.
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PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various claims and pending or threatened lawsuits in the normal course of our business. The Company is not currently a party to any legal proceedings that it believes would have a material adverse effect on its financial position, results of operations, or cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors described in our Form 10-K for the 2020 fiscal year ended January 2, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share Repurchases
The following table provides information about share repurchases during the third quarter of fiscal 2021:
| Period | Total number of shares purchased(1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs(2) | Approximate dollar value of shares that may yet be purchased under the plans or programs(3) | ||||||||||||||||||||||
| July 4, 2021 through July 31, 2021 | — | — | — | $ | 650,447,970 | |||||||||||||||||||||
| August 1, 2021 through August 28, 2021 | 99,085 | $ | 106.46 | 97,200 | $ | 640,099,889 | ||||||||||||||||||||
| August 29, 2021 through October 2, 2021 | 998,699 | $ | 100.04 | 998,699 | $ | 540,186,295 | ||||||||||||||||||||
| Total | 1,097,784 | 1,095,899 | ||||||||||||||||||||||||
(1)Includes shares of our common stock surrendered by our employees to satisfy required tax withholding upon the vesting of restricted stock awards. There were 1,885 shares surrendered between August 01, 2021 and August 28, 2021.
(2)Share purchases during the third quarter of fiscal 2021 were made in compliance with all applicable rules and regulations and in accordance with the share repurchase authorizations described in Note 7, Common Stock, to our accompanying unaudited condensed consolidated financial statements included in Part I. Item 1 of this Quarterly Report on Form 10-Q.
(3)Under share repurchase authorizations approved by our Board of Directors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. MINE SAFETY DISCLOSURES
N/A
ITEM 5. OTHER INFORMATION
N/A
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ITEM 6. EXHIBITS
| Exhibit Number | Description of Exhibits | ||||
| 3.1 | |||||
| 3.2 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32 | |||||
| Exhibit No. (101).INS | XBRL Instance Document - the instant document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||
| Exhibit No. (101).SCH | XBRL Taxonomy Extension Schema Document | ||||
| Exhibit No. (101).CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| Exhibit No. (101).DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| Exhibit No. (101).LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
| Exhibit No. (101).PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| Exhibit No. 104 | The cover page from this Current Report on Form 10-Q formatted as Inline XBRL | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CARTER’S, INC.
| October 29, 2021 | /s/ MICHAEL D. CASEY | ||||
| Michael D. Casey | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| October 29, 2021 | /s/ RICHARD F. WESTENBERGER | ||||
| Richard F. Westenberger | |||||
| Executive Vice President and | |||||
| Chief Financial Officer | |||||
| (Principal Financial and Accounting Officer) | |||||
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