Carter’s, Inc. Reports Third Quarter Fiscal 2016 Results

  • Net sales $901 million, growth of 6%
  • Diluted EPS $1.60, growth of 7%; adjusted diluted EPS $1.61, growth
    of 6%
  • Returned $289 million to shareholders through share repurchases and
    dividends in the first three quarters of fiscal 2016
  • Fiscal 2016 outlook: sales growth of 5% to 6%; adjusted diluted EPS
    growth of 9% to 10%

ATLANTA–(BUSINESS WIRE)–Carter’s, Inc. (NYSE:CRI), the largest branded marketer in the United
States and Canada of apparel exclusively for babies and young children,
today reported its third quarter fiscal 2016 results.

“In the third quarter, we achieved a record level of sales and earnings
with sales growth in all channels of distribution,” said Michael D.
Casey, Chairman and Chief Executive Officer. “Our performance in the
quarter reflects significant growth in online sales and higher demand
from international customers. Given the current trends in our business,
we expect to achieve our growth objectives this year and 28th
consecutive year of sales growth.”

Consolidated Results

Third Quarter of Fiscal 2016 compared to Third Quarter of Fiscal 2015

Net sales increased $51.6 million, or 6.1%, to $901.4 million,
reflecting growth in the Company’s U.S. Carter’s and OshKosh retail
businesses, Carter’s wholesale business, and international
segment. Changes in foreign currency exchange rates in the third quarter
of fiscal 2016 compared to the third quarter of fiscal 2015 favorably
affected consolidated net sales in the third quarter of fiscal 2016 by
$0.3 million, or 0.1%. On a constant currency basis (a non-GAAP
measure), consolidated net sales increased 6.0% in the third quarter of
fiscal 2016.

Operating income in the third quarter of fiscal 2016 increased $0.7
million, or 0.5%, to $130.9 million, compared to $130.2 million in the
third quarter of fiscal 2015. Operating margin decreased approximately
80 basis points to 14.5%, compared to 15.3% in the third quarter of
fiscal 2015. Adjusted operating income (a non-GAAP measure) increased
$0.2 million, or 0.2%, to $131.4 million, compared to $131.2 million in
the third quarter of fiscal 2015. Adjusted operating margin (a non-GAAP
measure) decreased approximately 80 basis points to 14.6%, compared to
15.4% in the third quarter of fiscal 2015, which reflected increased
investments in store expansion and technology, partially offset by
improved gross margin.

Net income in the third quarter of fiscal 2016 increased $1.5 million,
or 1.9%, to $80.8 million, or $1.60 per diluted share, compared to $79.3
million, or $1.51 per diluted share, in the third quarter of fiscal
2015. Adjusted net income (a non-GAAP measure) increased $1.2 million,
or 1.5%, to $81.1 million, compared to $79.9 million in the third
quarter of fiscal 2015. Adjusted earnings per diluted share (a non-GAAP
measure) in the third quarter of fiscal 2016 increased 6.2% to $1.61,
compared to $1.52 in the third quarter of fiscal 2015.

First Three Quarters of Fiscal 2016 compared to First Three Quarters
of Fiscal 2015

Net sales increased $117.6 million, or 5.5%, to $2.26 billion,
reflecting growth in the Company’s U.S. Carter’s and OshKosh retail
businesses, Carter’s wholesale business, and international
segment. Changes in foreign currency exchange rates in the first three
quarters of fiscal 2016 compared to the first three quarters of fiscal
2015 negatively affected consolidated net sales in the first three
quarters of fiscal 2016 by $6.7 million, or 0.3%. On a constant currency
basis (a non-GAAP measure), consolidated net sales increased 5.8% in the
first three quarters of fiscal 2016.

Operating income in the first three quarters of fiscal 2016 increased
$10.5 million, or 3.8%, to $287.1 million, compared to $276.7 million in
the first three quarters of fiscal 2015. Operating margin decreased
approximately 20 basis points to 12.7%, compared to 12.9% in the first
three quarters of fiscal 2015. Adjusted operating income (a non-GAAP
measure) increased $5.5 million, or 1.9%, to $289.4 million, compared to
$283.9 million in the first three quarters of fiscal 2015. Adjusted
operating margin (a non-GAAP measure) decreased approximately 40 basis
points to 12.8%, compared to 13.2% in the first three quarters of fiscal
2015, which reflected increased investments in growth initiatives,
partially offset by improved gross margin.

Net income in the first three quarters of fiscal 2016 increased $5.8
million, or 3.5%, to $171.0 million, or $3.34 per diluted share,
compared to $165.2 million, or $3.12 per diluted share, in the first
three quarters of fiscal 2015. Adjusted net income (a non-GAAP measure)
increased $2.0 million, or 1.2%, to $172.4 million, compared to $170.4
million in the first three quarters of fiscal 2015. Adjusted earnings
per diluted share (a non-GAAP measure) in the first three quarters of
fiscal 2016 increased 4.7% to $3.37, compared to $3.22 in the first
three quarters of fiscal 2015.

Cash flow from operations in the first three quarters of fiscal 2016 was
$116.6 million compared to $146.0 million in the first three quarters of
fiscal 2015. The decrease reflected unfavorable changes in net working
capital, partially offset by an increase in net income.

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

Business Segment Results

During the first three quarters of fiscal 2016, the Company believes
that Carter’s and OshKosh retail comparable sales were
negatively affected by lower demand from international consumers
shopping in its U.S. stores and on its website, which the Company
believes was influenced by the strength of the U.S. dollar relative to
other currencies. However, the Company believes these effects were less
pronounced in the third quarter of fiscal 2016 as its U.S. retail
business experienced improvement in demand from international consumers.

Carter’s Retail Segment

Third Quarter of Fiscal 2016 compared to Third Quarter of Fiscal 2015

Carter’s retail segment sales increased $19.8 million, or 6.7%,
to $314.7 million. Carter’s retail comparable sales increased
2.1%, comprised of eCommerce comparable sales growth of 25.2%, partially
offset by a stores comparable sales decrease of 4.1%.

In the third quarter of fiscal 2016, the Company opened 13 Carter’s
stores and closed one store in the United States.

First Three Quarters of Fiscal 2016 compared to First Three Quarters
of Fiscal 2015

Carter’s retail segment sales increased $61.2 million, or 7.7%,
to $860.9 million. Carter’s retail comparable sales increased
2.1%, comprised of eCommerce comparable sales growth of 19.7%, partially
offset by a stores comparable sales decline of 2.4%.

In the first three quarters of fiscal 2016, the Company opened 44 Carter’s
stores and closed two stores in the United States. The Company operated
636 Carter’s stores in the United States as of October 1, 2016.

Carter’s Wholesale Segment

Third Quarter of Fiscal 2016 compared to Third Quarter of Fiscal 2015

Carter’s wholesale segment net sales increased $12.7 million, or
3.7%, to $356.3 million, reflecting earlier customer demand and improved
pricing due to favorable product mix.

First Three Quarters of Fiscal 2016 compared to First Three Quarters
of Fiscal 2015

Carter’s wholesale segment net sales increased $17.5 million, or
2.1%, to $842.1 million, reflecting improved pricing due to favorable
product mix.

OshKosh Retail Segment

Third Quarter of Fiscal 2016 compared to Third Quarter of Fiscal 2015

OshKosh retail segment net sales increased $8.7 million, or 8.9%,
to $107.0 million. OshKosh retail comparable sales increased
4.1%, comprised of eCommerce comparable sales growth of 34.8%, partially
offset by a stores comparable sales decline of 3.0%.

In the third quarter of fiscal 2016, the Company opened seven OshKosh
stores in the United States and closed two stores.

First Three Quarters of Fiscal 2016 compared to First Three Quarters
of Fiscal 2015

OshKosh retail segment net sales increased $22.9 million, or
9.4%, to $267.7 million. OshKosh retail comparable sales
increased 2.1%, comprised of eCommerce comparable sales growth of 24.9%,
partially offset by a stores comparable sales decline of 3.5%.

In the first three quarters of fiscal 2016, the Company opened 30 OshKosh
stores in the United States and closed four stores. The Company operated
267 OshKosh stores in the United States as of October 1, 2016.

OshKosh Wholesale Segment

Third Quarter of Fiscal 2016 compared to Third Quarter of Fiscal 2015

OshKosh wholesale segment net sales decreased $1.3 million, or
7.0%, to $17.5 million due to a decrease in the number of units shipped,
reflecting lower seasonal bookings, and a decrease in the average price
per unit.

First Three Quarters of Fiscal 2016 compared to First Three Quarters
of Fiscal 2015

OshKosh wholesale segment net sales decreased $10.4 million, or
21.1%, to $38.8 million due to a decrease in the number of units
shipped, reflecting lower seasonal bookings, and a decrease in the
average price per unit.

International Segment

Third Quarter of Fiscal 2016 compared to Third Quarter of Fiscal 2015

International segment net sales increased $11.8 million, or 12.5%, to
$106.0 million, driven by growth in the Company’s retail businesses in
Canada, increased wholesale demand in international markets, and
eCommerce sales in China.

Changes in foreign currency exchange rates in the third quarter of
fiscal 2016 compared to the third quarter of fiscal 2015 favorably
affected international segment net sales in the third quarter of fiscal
2016 by $0.3 million, or 0.3%. On a constant currency basis (a non-GAAP
measure), international segment net sales increased 12.2%.

For the third quarter of fiscal 2016, Canada retail comparable sales
increased 1.6%, comprised of eCommerce comparable sales growth of 37.2%,
partially offset by a stores comparable sales decline of 0.5%. In the
third quarter of fiscal 2016, the Company opened six stores in Canada.

First Three Quarters of Fiscal 2016 compared to First Three Quarters
of Fiscal 2015

International segment net sales increased $26.3 million, or 11.5%, to
$255.5 million, principally driven by growth in the Company’s retail
businesses in Canada, new eCommerce sales in China, and increased
wholesale demand in international markets, partially offset by
unfavorable foreign currency exchange rates.

Changes in foreign currency exchange rates in the first three quarters
of fiscal 2016 compared to the first three quarters of fiscal 2015
negatively affected international segment net sales in the first three
quarters of fiscal 2016 by $6.7 million, or 2.9%. On a constant currency
basis (a non-GAAP measure), international segment net sales increased
14.4%.

For the first three quarters of fiscal 2016, Canada retail comparable
sales increased 7.2%, comprised of stores comparable sales growth of
5.4% and eCommerce comparable sales growth of 37.3%. In the first three
quarters of fiscal 2016, the Company opened nine stores in Canada. The
Company operated 156 stores in Canada as of October 1, 2016.

Return of Capital

Since the beginning of fiscal 2013, the Company has returned a total of
$1.05 billion to shareholders through share repurchases and cash
dividends.

In the third quarter of fiscal 2016, the Company returned a total of
$75.4 million to shareholders through share repurchases and cash
dividends. In the first three quarters of fiscal 2016, the Company
returned a total of $289.3 million to shareholders through share
repurchases and cash dividends, as described below.

During the third quarter of fiscal 2016, the Company repurchased and
retired 587,100 shares of its common stock for $58.9 million at an
average price of $100.37 per share. In the first three quarters of
fiscal 2016, the Company repurchased and retired 2,358,947 shares of its
common stock for $239.1 million at an average price of $101.37 per
share. Fiscal year-to-date through October 26, 2016, the Company
repurchased and retired a total of 2,666,947 shares for $266.1 million
at an average price of $99.76 per share. All shares were repurchased in
open market transactions pursuant to applicable regulations for such
transactions. As of October 26, 2016, the total remaining capacity under
the Company’s previously announced repurchase authorizations was
approximately $309 million.

During the third quarter of fiscal 2016, the Company paid a cash
dividend of $0.33 per share totaling $16.5 million. In the first three
quarters of fiscal 2016, the Company paid cash dividends of $0.99 per
share totaling $50.1 million. Future declarations of quarterly dividends
and the establishment of related record and payment dates will be at the
discretion of the Company’s Board of Directors based on a number of
factors, including the Company’s future financial performance and other
considerations.

2016 Business Outlook

For the fourth quarter of fiscal 2016, the Company projects net sales
will increase approximately 5% to 6% compared to the fourth quarter of
fiscal 2015 and adjusted diluted earnings per share in the range of
$1.65 to $1.70 (growth of approximately 18% to 21%) compared to adjusted
diluted earnings per share of $1.40 in the fourth quarter of fiscal
2015. This forecast for the fourth quarter of fiscal 2016 adjusted
earnings per share excludes anticipated expenses of approximately $0.3
million related to the Company’s direct sourcing initiative. The Company
believes that these adjustments provide a meaningful comparison of the
Company’s results and afford investors a view of what management
considers to be the Company’s core performance.

For fiscal 2016, the Company continues to project net sales growth of
approximately 5% to 6% compared to fiscal 2015 and now projects adjusted
diluted earnings per share will increase approximately 9% to 10%
(previously projected growth of approximately 10%) compared to adjusted
diluted earnings per share of $4.61 in fiscal 2015. This forecast for
fiscal 2016 adjusted earnings per share excludes anticipated expenses of
approximately $1.7 million related to the amortization of acquired
tradenames and $0.8 million related to the Company’s direct sourcing
initiative. The Company believes that these adjustments provide a
meaningful comparison of the Company’s results and afford investors a
view of what management considers to be the Company’s core performance.

Conference Call

The Company will hold a conference call with investors to discuss third
quarter fiscal 2016 results and its business outlook on October 27, 2016
at 8:30 a.m. Eastern Daylight Time. To participate in the call, please
dial 913-981-5519. To listen to a live broadcast via the internet,
please visit www.carters.com
and select the “Q3 2016 Earnings Conference Call” link under the
“Investor Relations” tab. Presentation materials for the call can be
accessed under the same tab by selecting the link for “News & Events”
followed by “Webcasts & Presentations.” A replay of the call will be
available shortly after the broadcast through November 5, 2016, at
888-203-1112 (U.S. / Canada) or 719-457-0820 (international), passcode
5816538. The replay will also be archived on the Company’s website under
the “Investor Relations” tab.

About Carter’s, Inc.

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

Cautionary Language

This press release contains forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 relating to the Company’s future
performance, including, without limitation, statements with respect to
the Company’s anticipated financial results for the fourth quarter of
fiscal 2016 and fiscal year 2016, or any other future period,
assessments of the Company’s performance and financial position, and
drivers of the Company’s sales and earnings growth. Such statements are
based on current expectations only, and are subject to certain risks,
uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize or not materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated, or projected. Certain of the risks and
uncertainties that could cause actual results and performance to differ
materially are described in the Company’s most recently filed Annual
Report on Form 10-K and other reports filed with the Securities and
Exchange Commission from time to time under the headings “Risk Factors”
and “Forward-Looking Statements.” Included among the risks and
uncertainties that may impact future results are the risks of: losing
one or more major customers, vendors, or licensees, due to competition,
inadequate quality of the Company’s products, or otherwise; financial
difficulties for one or more of the Company’s major customers, vendors,
or licensees, or an overall decrease in consumer spending; fluctuations
in foreign currency exchange rates; our products not being accepted in
the marketplace, due to quality concerns, changes in consumer preference
and fashion trends, or otherwise; negative publicity, including as a
result of product recalls or otherwise; failure to protect the Company’s
intellectual property; various types of litigation, including class
action litigation brought under various consumer protection, employment,
and privacy and information security laws; a breach of the Company’s
consumer databases, systems, or processes; the risk of slow-downs,
disruptions, or strikes along the Company’s supply chain, including
disruptions resulting from foreign supply sources, the Company’s
distribution centers, or in-sourcing capabilities; unsuccessful
expansion into international markets or failure to successfully manage
legal, regulatory, political and economic risks of the Company’s
existing international operations, including maintaining compliance with
worldwide anti-bribery laws; and an inability to obtain additional
financing on favorable terms. The Company does not undertake any
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise.

       

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)

 
 
Fiscal Quarter Ended Three Fiscal Quarters Ended
October 1, 2016     October 3, 2015 October 1, 2016     October 3, 2015
Net sales $ 901,425 $ 849,806 $ 2,264,981 $ 2,147,335
Cost of goods sold 525,879   502,267   1,296,324   1,252,849  
Gross profit 375,546 347,539 968,657 894,486
Selling, general, and administrative expenses 255,322 230,017 712,782 650,496
Royalty income (10,670 ) (12,699 ) (31,270 ) (32,688 )
Operating income 130,894 130,221 287,145 276,678
Interest expense 6,779 6,907 20,321 20,534
Interest income (68 ) (91 ) (453 ) (385 )
Other (income) expense, net (36 ) (622 ) 3,673   (560 )
Income before income taxes 124,219 124,027 263,604 257,089
Provision for income taxes 43,408   44,701   92,615   91,866  
Net income $ 80,811   $ 79,326   $ 170,989   $ 165,223  
 
Basic net income per common share $ 1.62 $ 1.52 $ 3.37 $ 3.15
Diluted net income per common share $ 1.60 $ 1.51 $ 3.34 $ 3.12
Dividend declared and paid per common share $ 0.33 $ 0.22 $ 0.99 $ 0.66
 
         

CARTER’S, INC.

BUSINESS SEGMENT RESULTS

(dollars in thousands)

(unaudited)

 
 
Fiscal Quarter Ended Three Fiscal Quarters Ended

October 1,
2016

   

% of
Total Net
Sales

   

October 3,
2015

   

% of
Total Net
Sales

October 1,
2016
   

% of
Total Net
Sales

    October 3,
2015
   

% of
Total Net
Sales

Net sales:

Carter’s Wholesale $ 356,258 39 .5% $ 343,555 40 .4% $ 842,136 37 .2% $ 824,600 38.4%
Carter’s Retail (a) 314,699   34 .9% 294,928   34 .7% 860,854   38 .0% 799,635   37.2%
Total Carter’s (U.S.) 670,957   74 .4% 638,483   75 .1% 1,702,990   75 .2% 1,624,235   75.6%
OshKosh Retail (a) 106,999 11 .9% 98,292 11 .6% 267,715 11 .8% 244,787 11.4%
OshKosh Wholesale 17,474   1 .9% 18,794   2 .2% 38,772   1 .7% 49,151   2.3%
Total OshKosh (U.S.) 124,473   13 .8% 117,086   13 .8% 306,487   13 .5% 293,938   13.7%
International (b) 105,995   11 .8% 94,237   11 .1% 255,504   11 .3% 229,162   10.7%
Total net sales $ 901,425   100 .0% $ 849,806   100 .0% $ 2,264,981   100 .0% $ 2,147,335   100.0%
 

Operating income (loss):

% of
Segment
Net Sales

% of
Segment
Net Sales

% of
Segment
Net Sales
% of
Segment
Net Sales
Carter’s Wholesale $ 81,551 22 .9% $ 74,347 21 .6% $ 187,655 22 .3% $ 172,485 20.9%
Carter’s Retail (a) 48,051   15 .3% 51,733   17 .5% 127,738   14 .8% 134,557   16.8%
Total Carter’s (U.S.) 129,602   19 .3% 126,080   19 .7% 315,393   18 .5% 307,042   18.9%
OshKosh Retail (a) 2,652 2 .5% 6,171 6 .3% (614 ) (0 .2)% 3,396 1.4%
OshKosh Wholesale (U.S.) 4,450   25 .5% 4,487   23 .9% 8,266   21 .3% 9,715   19.8%
Total OshKosh 7,102   5 .7% 10,658   9 .1% 7,652   2 .5% 13,111   4.5%
International (b) (c) 19,645   18 .5% 18,220   19 .3% 37,191   14 .6% 30,967   13.5%
Corporate expenses (d) (e) (f) (25,455 ) (24,737 ) (73,091 ) (74,442 )
Total operating income $ 130,894   14 .5% $ 130,221   15 .3% $ 287,145   12 .7% $ 276,678   12.9%
       

 

(a) Includes eCommerce results.
(b) Net sales includes international retail, eCommerce, and wholesale
sales. Operating income includes international licensing income.
(c) Includes charges associated with the revaluation of the Company’s
contingent consideration related to the Company’s 2011 acquisition
of Bonnie Togs of approximately $1.9 million for the first three
fiscal quarters ended October 3, 2015.
(d) Corporate expenses include expenses related to incentive
compensation, stock-based compensation, executive management,
severance and relocation, finance, building occupancy, information
technology, legal, consulting, and audit fees.
(e) Includes charges related to the amortization of the H.W. Carter and
Sons tradenames of approximately $1.7 million for the three fiscal
quarters ended October 1, 2016, and approximately $1.0 million and
$5.3 million for the fiscal quarter and three fiscal quarters ended
October 3, 2015, respectively. This amortization expense for the
third fiscal quarter ended October 1, 2016 was not material.
(f) Includes charges related to the Company’s direct sourcing initiative
of $0.5 million for the fiscal quarter and for the three fiscal
quarters ended October 1, 2016.
           

CARTER’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)

 
 
October 1, 2016 January 2, 2016 October 3, 2015
ASSETS
Current assets:
Cash and cash equivalents $ 140,626 $ 381,209 $ 288,260
Accounts receivable, net 271,207 207,570 246,565
Finished goods inventories 552,726 469,934 511,520
Prepaid expenses and other current assets 43,155 37,815 36,414
Deferred income taxes 37,600   34,080   34,895  
Total current assets 1,045,314 1,130,608 1,117,654
Property, plant, and equipment, net of accumulated depreciation of
$333,660, $290,636, and $276,230, respectively
388,440 371,704 361,305
Tradenames, net 308,973 310,848 311,842
Goodwill 176,956 174,874 176,633
Other assets 18,022   15,620   14,940  
Total assets $ 1,937,705   $ 2,003,654   $ 1,982,374  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 155,223 $ 157,648 $ 173,594
Other current liabilities 126,922   105,070   105,199  
Total current liabilities 282,145 262,718 278,793
 
Long-term debt, net 580,613 578,972 579,612
Deferred income taxes 129,278 128,838 119,499
Other long-term liabilities 169,535   158,075   161,527  
Total liabilities 1,161,571 1,128,603 1,139,431
 
Commitments and contingencies
 
Stockholders’ equity:
Preferred stock; par value $.01 per share; 100,000 shares
authorized; none issued or outstanding at October 1, 2016, January
2, 2016, and October 3, 2015
Common stock, voting; par value $.01 per share; 150,000,000 shares
authorized; 49,625,609, 51,764,309, and 52,076,784 shares issued and
outstanding at October 1, 2016, January 2, 2016 and October 3, 2015,
respectively
496 518 521
Additional paid-in capital
Accumulated other comprehensive loss (31,889 ) (36,367 ) (33,480 )
Retained earnings 807,527   910,900   875,902  
Total stockholders’ equity 776,134   875,051   842,943  
Total liabilities and stockholders’ equity $ 1,937,705   $ 2,003,654   $ 1,982,374  
 

Contacts

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

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