Carter's, Inc. Reports Fourth Quarter and Fiscal Year 2023 Results

• Fourth quarter fiscal 2023 results
  • Net sales $858 million vs. $912 million in Q4 2022
  • Operating margin 15.9% vs. 12.0% in Q4 2022; adjusted operating margin 15.9% vs. 13.0% in Q4 2022
  • Diluted EPS $2.90 vs. $2.11 in Q4 2022; adjusted diluted EPS $2.76 vs. $2.29 in Q4 2022
• Fiscal year 2023 results
  • Net sales $2.9 billion vs. $3.2 billion in 2022
  • Operating margin 11.0% vs. 11.8% in 2022; adjusted operating margin 11.1% vs. 12.1% in 2022
  • Diluted EPS $6.24 vs. $6.34 in 2022; adjusted diluted EPS $6.19 vs. $6.90 in 2022
  • Operating cash flow $529 million
  • $212 million returned to shareholders through share repurchases and dividends
• Fiscal year 2024 outlook¹:
  • Low single-digit growth in net sales to approximately $3.0 billion
  • Mid single-digit growth in adjusted operating income
  • Mid single-digit growth in adjusted diluted EPS
  • Board of Directors declares 7% increase in quarterly dividend to $0.80 per share

Carter's, Inc. (NYSE:CRI), the largest branded marketer of young children's apparel in North America, today reported its fourth quarter and fiscal 2023 results.

"We saw an improving trend in the demand for our brands in the final weeks of 2023," said Michael D. Casey, Chairman and Chief Executive Officer. "Sales improved sequentially each month in the fourth quarter and drove higher than expected earnings. Our focus on product innovation, inventory management, pricing discipline, and cash flow enabled over 20% growth in earnings per share in the fourth quarter and over $500 million of operating cash flow for the year.

"In the fourth quarter, we saw higher than planned demand in our U.S. Wholesale business driven by improved replenishment trends, on-time deliveries, and earlier demand for our new Spring 2024 product offerings. We saw lower than planned sales in our U.S. Retail and International segments largely due to sluggish traffic to our stores and websites earlier in the quarter due, we believe, to warmer weather and the related impact on demand for our fall and winter product offerings.

"For the year, our sales and earnings continued to reflect the lingering effects of inflation weighing on families with young children. We saw a noteworthy correlation between the improved consumer sentiment late in the year and the trend in our sales. That favorable trend in sales continued into the early weeks of 2024. With the continued moderation in inflation, growth in real wages, and low unemployment, we believe market conditions may improve in the year ahead.

"Carter's continues to be the market leader in young children's apparel with unparalleled relationships with the largest retailers in North America. Our brands are sold through over 20,000 points of sale worldwide. No other company in young children's apparel has broader distribution capabilities serving the needs of families with young children.

"Carter's has built a resilient multichannel business model which has historically enabled a double digit operating margin, strong operating cash flow, low leverage, and the return of excess capital to our shareholders.

"During the market disruptions in recent years caused by the global pandemic and historic inflation, we focused on higher margin sales driven by strengthening our product offerings, the closure of lower margin stores, leaner inventories, and improved price realization. We expect that these improvements to our operating disciplines will enable Carter's to grow sales and earnings in 2024.

"We enter the new year with a better mix and level of inventories. Inventories last year were reduced by nearly 30% driven by the reduction of excess inventories that grew when inflation surged in 2022 and consumer demand slowed.

"Our growth this year is expected to be driven by our U.S. Retail and U.S. Wholesale segments. International demand for our brands is expected to be comparable to last year, with sales impacted by market disruptions in the Middle East and Europe, and inflationary pressures weighing on consumers in Canada.

"We believe Carter's is best in class in young children's apparel. As demonstrated in recent years, Carter's has multiple levers that have enabled us to manage through historic periods of market volatility, and we believe we are well positioned to benefit from the market recovery in the years ahead."

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¹ Refer to "Business Outlook" section of this release for additional information regarding reconciliations of forward-looking non-GAAP financial measures.

Adjustments to Reported GAAP Results

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

Consolidated Results

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

Fourth Quarter of Fiscal 2023 compared to Fourth Quarter of Fiscal 2022

Net sales decreased $54.3 million, or 5.9%, to $857.9 million, compared to $912.1 million in the fourth quarter of fiscal 2022. Macroeconomic factors, including inflation, higher interest rates, higher consumer debt levels, and uncertain probability of recession negatively affected demand from consumers in the quarter. Unseasonably warm weather also adversely affected demand for our fall and holiday product offerings earlier in the quarter. Demand in our North American retail businesses improved during the Thanksgiving holiday shopping period and continued through the end of the year. Our fiscal fourth quarter of 2023 performance reflected declines in U.S. Retail and U.S. Wholesale segment net sales, partially offset by growth in International segment net sales. U.S. Retail and U.S. Wholesale net sales declined 8.9% and 5.1%, respectively, while International net sales grew 4.6%. U.S. Retail comparable net sales declined 10.8%. Changes in foreign currency exchange rates used for translation in the fourth quarter of fiscal 2023, as compared to the fourth quarter of fiscal 2022, had a favorable effect on consolidated net sales of approximately $2.2 million, or 0.2%.

Operating income increased $26.5 million, or 24.2%, to $136.1 million, compared to $109.5 million in the fourth quarter of fiscal 2022. Operating margin increased 390 basis points to 15.9%, reflecting favorable ocean freight rates, lower inventory provisions, decreased distribution and freight costs, and lower marketing expense, partially offset by fixed cost deleverage on lower sales and higher performance-based compensation provisions. Fourth quarter fiscal 2022 results included a pre-tax charge of $9.0 million related to the write-down of the Skip Hop tradename asset recorded at the time of the acquisition of the Skip Hop business in February 2017. The growth in fourth quarter operating income of 24.2% reflected an improvement in trend in the business and compares to a 30.5% decline in operating income in the first three quarters of fiscal 2023.

Adjusted operating income (a non-GAAP measure) increased $17.5 million, or 14.8%, to $136.0 million, compared to $118.5 million in the fourth quarter of fiscal 2022. Adjusted operating margin increased 290 basis points to 15.9%, reflecting favorable ocean freight rates, lower inventory provisions, decreased distribution and freight costs, and lower marketing expense, partially offset by fixed cost deleverage on lower sales and higher performance-based compensation provisions. The growth in fourth quarter adjusted operating income of 14.8% reflects an improvement in trend in the business and compares to a 28.9% decline in adjusted operating income in the first three quarters of fiscal 2023.

Net income increased $26.3 million, or 32.8%, to $106.5 million, compared to $80.2 million in the fourth quarter of fiscal 2022. Diluted earnings per share increased 37.5% to $2.90, compared to $2.11 in the prior year period. Fourth quarter fiscal 2023 results included an after-tax benefit of $5.3 million resulting from a court-approved settlement related to credit card industry anti-trust litigation. Fourth quarter fiscal 2022 results included an after-tax charge of $6.9 million related to the write-down of the Skip Hop tradename.

Adjusted net income (a non-GAAP measure) increased $14.2 million, or 16.3%, to $101.2 million, compared to $87.0 million in the fourth quarter of fiscal 2022. Adjusted diluted earnings per share (a non-GAAP measure) increased 20.6% to $2.76, compared to $2.29 in the fourth quarter of fiscal 2022.

Fiscal Year 2023 compared to Fiscal Year 2022

Consolidated net sales decreased $267.1 million, or 8.3%, to $2.95 billion. Macroeconomic factors, as noted in the discussion of fourth quarter results above, negatively affected demand from consumers and wholesale customers. U.S. Retail, U.S. Wholesale, and International segment net sales declined 10.6%, 6.1%, and 5.1%, respectively. U.S. Retail comparable net sales declined 12.2%. Changes in foreign currency exchange rates used for translation in fiscal 2023, as compared to fiscal 2022, had an immaterial effect on consolidated net sales.

Operating income in fiscal 2023 decreased $55.8 million, or 14.7%, to $323.4 million, compared to $379.2 million in fiscal 2022. Operating margin decreased 80 basis points to 11.0%, reflecting fixed cost deleverage on lower sales, higher performance-based compensation provisions, and increased professional fees, partially offset by favorable ocean freight rates and lower inventory provisions. Fiscal 2023 results included a pre-tax charge of $4.4 million related to organizational restructuring. Fiscal 2022 results included a pre-tax charge of $9.0 million related to the write-down of the Skip Hop tradename.

Adjusted operating income (a non-GAAP measure) decreased $60.4 million, or 15.5% to $327.8 million, compared to $388.2 million in fiscal 2022. Adjusted operating margin decreased 100 basis points to 11.1%, reflecting fixed cost deleverage on lower sales, higher performance-based compensation provisions, and increased professional fees, partially offset by favorable ocean freight rates and lower inventory provisions.

Net income in fiscal 2023 decreased $17.5 million, or 7.0%, to $232.5 million, compared to $250.0 million in fiscal 2022. Diluted earnings per share decreased 1.6% to $6.24, compared to $6.34 in fiscal 2022. Fiscal 2023 results included an after-tax benefit of $5.3 million resulting from a court-approved settlement related to credit card industry anti-trust litigation and charge of $3.4 million related to organizational restructuring. Fiscal 2022 results included after-tax charges of $15.2 million related to a loss on extinguishment of debt and $6.9 million related to the write-down of the Skip Hop tradename.

Adjusted net income (a non-GAAP measure) decreased $41.4 million, or 15.2%, to $230.6 million compared to $272.0 million in fiscal 2022. Adjusted earnings per diluted share (a non-GAAP measure) decreased 10.3% to $6.19, compared to $6.90 in fiscal 2022.

Net cash provided by operations in fiscal 2023 was $529.1 million compared to $88.4 million in fiscal 2022. The improved operating cash flow principally reflected favorable changes in working capital, primarily lower inventories, and lower payments of performance-based compensation.

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

Organizational Restructuring and Corporate Office Lease Amendment

Since the global pandemic, the Company has undertaken several organizational restructurings which have collectively reduced corporate offices headcount by approximately 15%. Actions taken in fiscal 2023 resulted in a pre-tax charges of $6.2 million related to severance and other termination benefits and are expected to yield ongoing savings of approximately $18 million on an annualized basis beginning in 2024.

During the first quarter of fiscal 2023, the Company executed an amendment to the lease of its corporate headquarters in Atlanta, Georgia. As a result of the related reduction in leased office space, the Company recorded a net gain of approximately $1.8 million related to the partial termination of the lease in the first quarter of fiscal 2023. This action is expected to result in approximately $1 million in annualized savings beginning in 2024.

The above organizational restructuring and corporate office lease amendment charges have been included as adjustments to our fiscal 2023 reported GAAP results.

Liquidity and Financial Position

The Company's total liquidity at the end of fiscal 2023 was $1.2 billion, comprised of cash and cash equivalents of $351 million and $846 million in unused borrowing capacity on the Company's $850 million secured revolving credit facility.

Return of Capital

In the fourth quarter and fiscal 2023, the Company returned to shareholders a total of $60.0 million and $212.0 million, respectively, through share repurchases and cash dividends as described below.

• Share repurchases: During the fourth quarter of fiscal 2023, the Company repurchased and retired approximately 0.5 million shares of its common stock for $32.5 million at an average price of $69.10 per share. During fiscal 2023, the Company repurchased and retired approximately 1.4 million shares for $100.0 million at an average price of $69.17 per share. Fiscal 2023 share repurchases represented approximately 3.8% of common shares outstanding as of the beginning of fiscal year 2023. All shares were repurchased in open market transactions pursuant to applicable regulations for such transactions. As of December 30, 2023, the total remaining capacity under the Company's previously announced repurchase authorizations was approximately $649.5 million.

• Dividends: During the fourth quarter of fiscal 2023, the Company paid a cash dividend of $0.75 per common share totaling $27.5 million. In fiscal 2023, the Company paid quarterly cash dividends of $0.75 per common share each quarter totaling $112.0 million.

On February 26, 2024, the Company's Board of Directors declared a 7% increase ($0.05 per share) to its quarterly cash dividend, to $0.80 per share, for payment on March 29, 2024, to shareholders of record at the close of business on March 11, 2024.

From the inception of our return of capital initiatives in fiscal 2007 through fiscal 2023, the Company has returned a total of $3.2 billion to shareholders through share repurchases and dividends.

The Company's Board of Directors will evaluate future distributions of capital, including dividends and share repurchases, based on a number of factors, including business conditions, the Company's financial performance, and other considerations.

Business Outlook

We do not reconcile forward-looking adjusted operating income or adjusted diluted earnings per share to their most directly comparable GAAP measures because we cannot predict with reasonable certainty the ultimate outcome of certain components of such reconciliations that are not within our control due to factors described above, or others that may arise, without unreasonable effort. For these reasons, we are unable to assess the probable significance of the unavailable information, which could materially impact the amount of future operating income or diluted EPS, the most directly comparable GAAP metrics to adjusted operating income and adjusted diluted earnings per share, respectively.

For fiscal year 2024, the Company expects:

• Low single-digit growth in net sales to approximately $3.0 billion ($2.95 billion in fiscal 2023);
• Mid single-digit growth in adjusted operating income ($328 million in fiscal 2023);
• Mid single-digit growth in adjusted diluted earnings per share ($6.19 in fiscal 2023);
• Operating cash flow in excess of $250 million; and
• Capital expenditures of $80 million.

Our forecast for fiscal year 2024 assumes:

• Improved macroeconomic environment and consumer demand as the year progresses;
• Sales and earnings growth weighted to the second half;
• Continued conservative inventory commitments by wholesale customers;
• Gross margin expansion, driven by lower ocean freight rates, lower product costs, and growth in higher margin retail sales;
• Increased SG&A, reflecting higher growth-related investments and inflation, partially offset by productivity initiatives;
• Higher interest expense and effective tax rate; and
• Lower average number of shares outstanding.

For the first quarter of fiscal 2024, the Company expects approximately:

• $620 million to $645 million in net sales ($696 million in Q1 fiscal 2023);
• $35 million to $40 million in adjusted operating income ($58 million in Q1 fiscal 2023); and
• $0.60 to $0.70 in adjusted diluted earnings per share ($0.98 Q1 fiscal 2023).

Our forecast for the first quarter of fiscal 2024 assumes:

• A mid single-digit to high single-digit decline in U.S. Retail sales, a mid-teens decline in U.S. Wholesale sales (reflecting earlier demand for our spring product offerings and lower off-price channel sales), and a low single-digit to mid single-digit decline in International sales;
• Gross margin expansion, reflecting lower inbound freight rates, lower product costs, and favorable channel mix;
• Increased SG&A, driven by new store openings and higher performance-based compensation provisions;
• Lower interest expense and effective tax rate; and
• Lower average number of shares outstanding.

Conference Call

The Company will hold a conference call with investors to discuss fourth quarter and fiscal 2023 results and its business outlook on February 27, 2024 at 8:30 a.m. Eastern Standard Time. To listen to a live webcast and view the accompanying presentation materials, please visit ir.carters.com and select links for "News & Events" followed by "Webcasts & Presentations." To access the call by phone, please preregister on https://register.vevent.com/register/BIaee6e086e7574b0db4355d2c2a89c065 to receive your dial-in number and unique passcode.

A webcast replay will be available shortly after the conclusion of the call at ir.carters.com.

About Carter's, Inc.

Carter's, Inc. is the largest branded marketer in North America of apparel exclusively for babies and young children. The Company owns the Carter's and OshKosh B'gosh brands, two of the most recognized brands in the marketplace. These brands are sold through over 1,000 Company-operated stores in the United States, Canada, and Mexico and online at www.carters.com, www.oshkosh.com, www.cartersoshkosh.ca, and www.carters.com.mx. Carter's is the largest supplier of young children's apparel to the largest retailers in North America. Its brands are sold in leading department stores, national chains, and specialty retailers domestically and internationally. The Company's Child of Mine brand is available at Walmart, its Just One You brand is available at Target, and its Simple Joys brand is available on Amazon.com. The Company also owns Little Planet, a brand focused on organic fabrics and sustainable materials, and Skip Hop, a global lifestyle brand for families with young children. Carter's is headquartered in Atlanta, Georgia. Additional information may be found at www.carters.com.

Forward Looking Statements

Statements contained in this press release that are not historical fact and use predictive words such as "estimates", "outlook", "guidance", "expect", "believe", "intend", "designed", "target", "plans", "may", "will", "are confident" and similar words are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements and related assumptions involve risks and uncertainties that could cause actual results and outcomes to differ materially from any forward-looking statements or views expressed in this press release. These risks and uncertainties include, but are not limited to, the factors disclosed in Part I, Item 1A. "Risk Factors" of the Company's most recently filed Annual Report on Form 10-K, and otherwise in our reports and filings with the Securities and Exchange Commission, as well as the following factors: the continuing effects of the novel coronavirus (COVID-19) pandemic; changes in global economic and financial conditions, and the resulting impact on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits; continued inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue, to affect freight, transit, and other costs; risks related to geopolitical conflict, including ongoing geopolitical challenges between the United States and China, the ongoing hostilities in Ukraine and Israel, acts of terrorism, mass casualty events, social unrest, civil disturbance or disobedience; risks related to a shutdown of the U.S. government; financial difficulties for one or more of our major customers; an overall decrease in consumer spending, including, but not limited to, decreases in birth rates; our products not being accepted in the marketplace and our failure to manage our inventory; increased competition in the market place; diminished value of our brands; the failure to protect our intellectual property; the failure to comply with applicable quality standards or regulations; unseasonable or extreme weather conditions; pending and threatened lawsuits; a breach of our information technology systems and the loss of personal data; increased margin pressures, including increased cost of materials and labor and our inability to successfully increase prices to offset these increased costs; our foreign sourcing arrangements; disruptions in our supply chain, including increased transportation and freight costs; the management and expansion of our business domestically and internationally; the acquisition and integration of other brands and businesses; changes in our tax obligations, including additional customs, duties or tariffs; fluctuations in foreign currency exchange rates; risks associated with corporate responsibility issues; our ability to achieve our forecasted financial results for the fiscal year; our continued ability to declare and pay a dividend and conduct share repurchases in future periods; our planned opening and closing of stores during the fiscal year; and other risks detailed in the Company's periodic reports as filed in accordance with the Securities Exchange Act of 1934, as amended. 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.

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

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

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

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