Carter's, Inc. (NYSE:CRI) is the largest branded marketer of young children's apparel in North America. The company owns two of the most highly recognized and trusted brand names in the children's apparel market - Carter's and OshKosh B'gosh. Carter's has a long and storied history, having been established in 1865, while OshKosh was founded in 1895 and acquired by Carter's in 2005. The company also owns the Skip Hop brand, a leading young children's lifestyle brand, as well as exclusive Carter's brands developed for major retailers like Amazon, Target, and Walmart.

Business Overview

Carter's mission is to serve the needs of families with young children, with a vision to be the world's favorite brands in young children's apparel and related products. The company's multichannel, global business model includes retail stores, eCommerce, and wholesale distribution capabilities, as well as omni-channel capabilities in the United States and Canada. As of June 29, 2023, Carter's operated 1,027 company-owned retail stores in North America, along with eCommerce websites and approximately 19,350 wholesale locations in North America. Internationally, the company's products are sold through its own retail stores and eCommerce sites in Canada and Mexico, as well as through international wholesale accounts and licensees in over 1,100 locations outside of North America in over 90 countries.

Financials

In fiscal year 2023, Carter's generated annual revenue of $2,945,594,000 and net income of $232,500,000. The company's annual operating cash flow was $529,131,999, while its annual free cash flow was $469,271,999. These strong financial results demonstrate Carter's ability to generate significant cash flow and profitability, even in the face of macroeconomic headwinds.

For the second quarter of fiscal 2024, Carter's reported net sales of $564,434,000, down 6.0% from the prior year period. The company's gross profit margin expanded 150 basis points to 50.1%, driven by lower product input costs and freight rates, as well as a favorable customer mix. Operating income increased 5.0% to $39,452,000, with the operating margin expanding 70 basis points to 7.0%. Net income for the quarter grew 15.8% to $27,639,000, and diluted earnings per share increased 18.8% to $0.76.

Segment Performance

The company's performance was mixed across its business segments. In the U.S. Retail segment, net sales decreased 10.3% to $290,249,000, as lower traffic and demand in the company's eCommerce channels and retail stores offset growth in the company's exclusive Carter's brands sold through mass retailers. U.S. Retail operating margin declined 250 basis points to 6.2%.

In contrast, the U.S. Wholesale segment delivered a strong performance, with net sales increasing 3.2% to $192,911,000, driven by growth in the company's exclusive Carter's brands. U.S. Wholesale operating margin expanded 320 basis points to 18.8%, benefiting from lower product and freight costs, as well as a favorable customer mix.

The International segment saw net sales decline 9.6% to $81,274,000, primarily due to lower sales in Canada, which were impacted by macroeconomic pressures, as well as decreased demand from the company's international wholesale partners. International operating margin decreased 60 basis points to 6.8%.

Outlook

Looking ahead, Carter's provided updated guidance for the second half of fiscal 2024. The company now expects full-year net sales in the range of $2.785 billion to $2.825 billion, down from its previous guidance of $2.98 billion. This revised outlook reflects lower sales expectations in the U.S. Retail and International segments, partially offset by growth in the U.S. Wholesale business.

On the profitability front, Carter's guided for adjusted operating income in the range of $240 million to $260 million, and adjusted earnings per share between $4.60 and $5.05. The company plans to invest an additional $50 million in the second half, split evenly between pricing adjustments and increased brand marketing, in an effort to drive traffic and improve the value proposition for consumers.

Conclusion

Despite the macroeconomic challenges, Carter's remains well-positioned with its strong brand portfolio, diversified distribution channels, and focus on operational excellence. The company's high-margin business model and substantial cash flow generation provide the resources to invest in growth initiatives and return capital to shareholders. With a history of weathering economic cycles, Carter's is poised to emerge from the current environment in a position of strength.