- Revenue: $564 million in the second quarter, down 6% year-over-year.
- Gross Margin: 50.1%, an increase of 150 basis points, representing record gross margin performance.
- Operating Income: $39 million, representing growth of 4% over last year.
- Earnings Per Share (EPS): $0.76, up 19% year-over-year.
- Cash Flow: Over $90 million in operating cash flow in the first half.
- Dividends and Share Repurchases: $92 million distributed to shareholders in the first half.
- US Retail Segment Sales: Down 12% in the quarter.
- US Wholesale Segment Sales: Up 3% year-over-year.
- International Sales: Down 10% in the second quarter.
- Comparable Store Sales: Down 12% in the quarter.
- Store Sales: Down 8% in the quarter.
- E-commerce Sales: Down 16% in the quarter.
- Inventory: Lower inventories and higher cash position at the end of the quarter.
- Liquidity: Over $1 billion in liquidity at the end of the quarter.
- Effective Tax Rate: 19.6% in the second quarter.
- First Half Net Sales: Decreased 5% year-over-year.
- First Half EPS: Up 11% year-over-year.
- CapEx: $24 million in the first half.
- Revised Full-Year Net Sales Forecast: $2,785 million to $2,825 million.
- Revised Full-Year Operating Income Forecast: $240 million to $260 million.
- Revised Full-Year EPS Forecast: $4.60 to $5.05.
- Revised Full-Year Operating Cash Flow Forecast: Over $200 million.
- Third Quarter Net Sales Forecast: $735 million to $755 million.
- Third Quarter Operating Income Forecast: $60 million to $70 million.
- Third Quarter EPS Forecast: $1.10 to $1.35.
Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Earnings in the second quarter were meaningfully higher than planned, driven by a record gross profit margin.
- Cash flow through June trended better than planned, ending the quarter with a higher cash position and over $1 billion in liquidity.
- US wholesale sales saw good growth, driven by exclusive brands and higher demand.
- Baby apparel, which contributes over 50% of consolidated apparel sales, continues to be the best-performing age segment.
- The company has a strong supply chain with excellent on-time shipping and negotiated lower product costs for the balance of the year.
Negative Points
- US retail and international sales were lower than expected, with US retail comparable sales down 12% in the quarter.
- E-commerce sales were down 16% in the second quarter.
- International sales were down 10%, with significant declines in Canada and lower international wholesale sales.
- The company faced very aggressive promotions by competitors, with some items priced 50% below Carter's pricing.
- The revised annual forecast reflects a decline in consumer confidence and ongoing inflationary pressures, leading to lower expected sales and earnings.
Q & A Highlights
Q: Can you give more detail on the price decreases you're planning to make? Are they for wholesale or retail? Why some products and not others? And what about gross margin in Q3?
A: (Michael Casey, CEO) Our pricing was comparable year over year. We saw aggressive pricing from competitors, which impacted traffic. We plan to be more aggressive in the second half, with about half of the $40 million adjustment related to sharper price points on key items. Wholesale pricing will be comparable to slightly lower due to lower product costs.
A: (Richard Westenberger, CFO) For Q3, we expect a year-over-year gross margin decline of about 50 to 70 basis points, driven by lower product costs and lower off-price activity, but offset by higher transportation costs and the absence of inventory reserve releases from last year.
Q: Can you explain the difference in performance between retail and wholesale? Is it a replenishment versus discretionary dynamic?
A: (Michael Casey, CEO) In the first half, we sold fewer units direct-to-consumer but saw significant growth in exclusive brands. The weakness in retail is largely due to traffic. We're investing $40 million in price and $10 million in brand marketing to improve traffic trends. The market data suggests a channel shift, with mass channel and off-price retailers doing well while specialty retail is under pressure.
Q: Can you provide more details on the e-commerce lag compared to stores? What will the new executives focus on?
A: (Michael Casey, CEO) E-commerce has been down mid-teens, reflecting broader consumer behavior during this inflationary cycle. Consumers are less responsive to unsolicited marketing and are shopping closer to need. Stores provide immediacy, which is why they are performing better. The new executives will focus on leveraging their e-commerce experience to strengthen this component of our business.
Q: Can you clarify the gross margin guidance for the year? Does it imply a significant decline in Q4?
A: (Richard Westenberger, CFO) Yes, we expect a more dramatic year-over-year decline in gross margin in Q4, around 200 basis points. This is due to higher transportation costs, higher inventory costs, and a mix shift towards wholesale and off-price channels.
Q: Are the price investments in retail temporary or permanent?
A: (Michael Casey, CEO) We view the pricing adjustments as temporary, aimed at responding to current market conditions. We believe lowering prices is not a good long-term strategy but necessary in the current environment. We are also investing in brand marketing to drive traffic.
Q: What are your initial thoughts on store opening and closing plans for next year?
A: (Michael Casey, CEO) We plan to continue opening stores in good centers with strong traffic patterns. We are also testing new store models focused on baby and toddler apparel, which represent over 80% of our sales. We will continue to close stores where leases expire and the unit economics are not attractive.
Q: Did the Carter's flagship brand grow in department stores in Q2? How should we think about exclusive versus flagship brand growth in the back half?
A: (Michael Casey, CEO) The Carter's flagship brand, sold to department stores and club retailers, saw good traction with tailored strategies. We are also exploring opportunities in the off-price channel, which saw a 70% decline in unit volume in the first half due to clean inventory.
Q: What is the impact of the pricing adjustments on the product assortment?
A: (Michael Casey, CEO) The pricing adjustments will affect about 20% of the product assortment, with a mid-single-digit price decrease. This is a net impact, with sharper price points on key items to respond to market conditions.
Q: Any initial thoughts on AUC and product costs for early next year?
A: (Michael Casey, CEO) We have negotiated inbound freight costs through the second quarter of next year, with rate increases around 2%. The outlook for cotton, a key input cost, is currently favorable, with futures trending lower than current prices.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
