• Net Sales: $758 million in Q3, down 4% year-over-year.
• Operating Income: $77 million with an operating margin of 10.2%.
• Adjusted Earnings Per Share (EPS): $1.64, down 11% from last year.
• Gross Margin: 46.9%, a decline of 60 basis points from last year.
• US Retail Sales: Declined 6% in Q3.
• US Wholesale Sales: Comparable to last year.
• International Sales: Declined 9% on a reported basis.
• Inventory Levels: Declined 2% compared to last year.
• Cash Flow: Year-to-date operating cash flow was $11 million.
• Liquidity: Over $1 billion at the end of the quarter.
• Omnichannel Sales: 12% lift in Q3.
• Store Openings/Closures: Opening 40 high-margin stores and closing about 30 low-margin stores this year.
• US Retail Comp Sales: Down 7% in Q3.
• US Wholesale Operating Margin: Over 21%, down 90 basis points from last year.
• International Segment Margin: 9.6%, down from 11.7% last year.

• Warning! GuruFocus has detected 3 Warning Signs with AN.

Release Date: October 25, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Carter's Inc (NYSE:CRI) exceeded its third-quarter sales and earnings guidance, driven by strong performance in the US Retail segment.
• The company reported better-than-expected inventory levels and cash flow, ending the quarter with over $1 billion in liquidity and no seasonal borrowings.
• Carter's Inc (NYSE:CRI) saw a 12% lift in omnichannel sales, with 38% of digital orders supported by stores, enhancing margin-accretive transactions.
• The company experienced growth in its Baby apparel segment, which contributed over 50% of total apparel sales, and saw a lift in new and reactivated customers.
• Carter's Inc (NYSE:CRI) maintained its position as the largest supplier of children's apparel to major retailers like Target, Walmart, and Amazon, with exclusive brands forecasted to grow to 55% of total US Wholesale sales.

Negative Points

• Third-quarter net sales were down 4% year-over-year, with declines in the US Retail and International segments.
• The company experienced a double-digit decrease in sales for apparel targeting 4- to 10-year-old children, contributing less than 20% of total apparel sales.
• Carter's Inc (NYSE:CRI) faced a 60 basis point decline in gross margin due to price investments, a higher mix of lower-margin US Wholesale sales, and higher inbound freight costs.
• US Retail sales were down 6%, with e-commerce sales declining 10% year-to-date, reflecting ongoing challenges in consumer demand.
• The International segment saw a 9% decline in sales, with Canada experiencing a high single-digit decrease due to economic pressures and warmer weather affecting demand.

Q & A Highlights

Q: Can you explain the gross margin decline in Q3 and the expected pressure in Q4, given the pricing strategies? A: Richard Westenberger, CFO & COO, explained that the pricing investment in US Retail was about $25 million in Q3, with a similar amount planned for Q4. The mix effect between Q3 and Q4 is significant, with expected growth in Wholesale, which has a lower gross margin. The gross margin decline is expected to be around 200 basis points in Q4, with consistent pricing investment in US Retail.

Q: How do you assess the ROI of the pricing investments? A: Michael Casey, CEO, stated that the ROI is judged by the return to growth in unit volume. The pricing strategies aim to reengage consumers who shifted to mass channels and off-price retailers during inflation. The focus is on improving conversion rates, transactions, and unit volume, with positive trends observed, especially online.

Q: Will the $60 million pricing and marketing efforts in the second half continue into next year? A: Richard Westenberger, CFO & COO, mentioned that a significant portion of the pricing efforts focused on improving inventory mix. If inventory is managed well, the level of promotions seen in the second half should not continue into next year. The focus will be on maintaining a better mix of current season products.

Q: How did Carter's perform in terms of market share in the third quarter? A: Michael Casey, CEO, reported that Carter's gained market share in the Baby and Toddler apparel segments, which constitute over 80% of their business. The company is pleased with these results.

Q: What impact did the warmer fall weather have on inventory and sales? A: Richard Westenberger, CFO & COO, noted that while warmer weather in late Q3 slowed sales, significant progress was made in moving through spring and summer inventory. Cooler weather typically stimulates sales, and as it turns cooler, business trends have improved.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.