CARTER'S, INC.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 relating to our future performance, including, without
limitation, statements with respect to our anticipated financial results for any
other quarter or period in fiscal 2021 or any other future period, assessment of
our performance and financial position, drivers of our sales and earnings
growth, and the effects of the COVID-19 pandemic. 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 any of the underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, or
projected.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Certain of the risks and uncertainties that could cause actual results and
performance to differ materially are described in our most recently filed Annual
Report on Form 10-K, in Part I. under the heading "Item 1A. Risk Factors", and
other reports filed with the Securities and Exchange Commission from time to
time.
OVERVIEW
We are the largest branded marketer in North America of apparel exclusively for
babies and young children. We own two of the most highly recognized and most
trusted brand names in the children's apparel industry, Carter's and OshKosh
B'gosh (or "OshKosh"), and a leading baby and young child lifestyle brand, Skip
Hop.
Established in 1865, our Carter's brand is recognized and trusted by consumers
for high-quality apparel and accessories for children in sizes newborn to 14.
Established in 1895, OshKosh is a well-known brand, trusted by consumers for
high-quality apparel and accessories for children in sizes newborn to 14, with a
focus on playclothes for toddlers and young children.
Established in 2003, the Skip Hop brand re-thinks, re-energizes, and re-imagines
durable necessities to create higher value, superior quality, and top-performing
products for parents, babies, and toddlers. We acquired the Skip Hop brand in
February 2017 .
We also have three exclusive Carter's brands: our Child of Mine brand, which we
sell at Walmart, our Just One You brand, which we sell at Target, and our Simple
Joys brand, which we sell on Amazon. In February 2021 , we re-launched our little
planet brand, which focuses on clothing that is more sustainable and
eco-friendly.
Our mission is to serve the needs of all families with young children, with a
vision to be the world's favorite brands in young children's apparel and
products. We believe our brands provide a complementary product offering and
aesthetic, are each uniquely positioned in the marketplace, and offer strong
value to families with young children. Our multi-channel, global business model,
which includes retail stores, eCommerce, and wholesale sales channels, as well
as omni-channel capabilities in the United States , enables us to reach a broad
range of consumers around the world. We have extensive experience in the young
children's apparel and accessories market and focus on delivering products that
satisfy our consumers' needs. As of April 3, 2021 , the Company operated 1,036
retail stores in North America .
The following is a discussion of our results of operations and current financial
condition. This should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes included in this Form 10-Q
and audited consolidated financial statements and related notes included in our
Annual Report on Form 10-K for the 2020 fiscal year ended January 2, 2021 .
Segments
Our three business segments are: U.S. Retail, U.S. Wholesale, and International.
These segments are our operating and reporting segments. Our U.S. Retail segment
consists of revenue primarily from sales of products in the United States
through our retail stores and eCommerce websites. Similarly, our U.S. Wholesale
segment consists of revenue primarily from sales in the United States of
products to our wholesale partners. Finally, our International segment consists
of revenue primarily from sales of products outside the United States , largely
through our retail stores and eCommerce websites in Canada and Mexico , and sales
to our international wholesale customers and licensees.
Recent Developments
In the fourth quarter of fiscal 2020, we announced plans to close over 100
retail stores by the end of fiscal 2021. We closed over 60 stores in the first
quarter of fiscal 2021, most of which occurred towards the end of the quarter.
These retail store closures are primarily concentrated in unprofitable stores
and stores in less trafficked shopping centers. We continue to look for retail
store locations that allow us to better serve customers, including our
omni-channel customers, and remain profitable.
As previously announced, on April 21, 2021 , through our wholly owned subsidiary,
The William Carter Company ("TWCC"), we further amended our secured revolving
credit agreement to permit us, subject to certain restrictions, to pay cash
dividends and repurchase common stock, in aggregate amounts up to $250 million
through the date we deliver our financial statements and associated certificates
relating to the third quarter of fiscal 2021. Thereafter, provisions of our
secured revolving credit facility largely revert to their pre-pandemic terms.
On April 27, 2021 , our Board of Directors authorized a quarterly cash dividend
payment of $0.40 per common share, payable on May 28, 2021 , to shareholders of
record at the close of business on May 12, 2021 .
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
First Fiscal Quarter 2021 Highlights
•Consolidated net sales increased $132.9 million , or 20.3%, to $787.4 million in
the first quarter of fiscal 2021.
•Each of our business segments delivered double digit growth in net sales and in
operating income.
•Our eCommerce operations delivered strong growth, reflecting increased online
demand and enhanced marketing efforts.
•Growth in our retail store sales was primarily driven by increased store
traffic due to more stores being open throughout the first quarter of fiscal
2021 compared to the first quarter of fiscal 2020 and increased average selling
prices per unit. The first quarter of fiscal 2020 was adversely impacted by the
closure of our retail stores in March 2020 and reduced demand as a result of
disruptions related to COVID-19.
•Our omni-channel programs continued to deliver growth as a result of our
investments and enhancements in these programs, which included expanding our
curbside pickup program and direct-from-store shipment program in fiscal 2020.
•We continued to see growth with our exclusive brands, as U.S. sales of
exclusive brands to our top three wholesale customers grew 19.1%.
•Gross profit increased $163.7 million , or 71.7%, to $392.0 million in the first
quarter of fiscal 2021. Gross margin increased 1,490 basis points ("bps") to
49.8% in the first quarter of fiscal 2021 primarily driven by higher
consolidated net sales across our businesses, increased average selling prices
per unit, decreased product costs, decreased excess inventory provisions and a
benefit in fabric purchase commitment charges related to better than expected
sales of inventory and utilization of fabric that were reserved for in the first
quarter of fiscal 2020. Gross margin in the first quarter of fiscal 2020 was
adversely impacted by incremental inventory related charges of $48.7 million ,
inclusive of $22.8 million in adverse inventory and fabric purchase commitments,
primarily from disruptions related to COVID-19.
•Selling, general and administrative ("SG&A") expenses as a percentage of total
net sales ("SG&A rate") decreased 670 bps to 34.5% for the first quarter of
fiscal 2021. The decrease in the SG&A rate was primarily driven by increased
consolidated net sales, better leverage of retail store expenses due to more
stores being open throughout the first quarter of fiscal 2021 compared to the
first quarter of fiscal 2020, decreased organizational restructuring charges,
decreased costs associated with the COVID-19 pandemic, decreased marketing
costs, decreased bad debt expense, and decreased information technology related
costs, partially offset by increased performance-based compensation expense and
increased costs related to productivity initiatives.
•Operating income was $127.5 million in the first quarter of fiscal 2021
compared to an operating loss of $78.5 million in the first quarter of fiscal
2020, primarily due to the factors discussed above and the recognition of
$44.2 million in impairment charges in the first quarter of fiscal 2020 that did
not reoccur in the first quarter of fiscal 2021.
•Net income was $86.2 million in the first quarter of fiscal 2021 compared to a
net loss of $78.7 million in the first quarter of fiscal 2020, primarily due to
the factors discussed above, increased interest expense in the first quarter of
fiscal 2021, and the tax impacts of each quarter.
•Diluted net income per common share was $1.96 in the first quarter of fiscal
2021 compared to a diluted net loss per common share of $1.82 in the first
quarter of fiscal 2020.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
FIRST FISCAL QUARTER ENDED APRIL 3, 2021 COMPARED TO FIRST FISCAL QUARTER ENDED
MARCH 28, 2020
The following table summarizes our results of operations. All percentages shown
in the below table and the discussion that follows have been calculated using
unrounded numbers.
Fiscal quarter ended
(dollars in thousands, except per
share data) April 3, 2021 March 28, 2020 $ Change % / bps Change
Consolidated net sales $ 787,361 $ 654,473 $ 132,888 20.3 %
Cost of goods sold 401,731 403,373 (1,642) (0.4) %
Adverse purchase commitments
(inventory and raw materials), net (6,330) 22,837 (29,167) nm
Gross profit 391,960 228,263 163,697 71.7 %
Gross profit as % of consolidated net
sales 49.8 % 34.9 % 1,490 bps
Royalty income, net 7,463 7,338 125 1.7 %
Royalty income as % of consolidated
net sales 0.9 % 1.1 % (20) bps
Selling, general, and administrative
expenses 271,927 269,837 2,090 0.8 %
SG&A expenses as % of consolidated
net sales 34.5 % 41.2 % (670) bps
Goodwill impairment - 17,742 (17,742) nm
Intangible asset impairment - 26,500 (26,500) nm
Operating income (loss) 127,496 (78,478) 205,974 262.5 %
Operating income (loss) as % of
consolidated net sales 16.2 % (12.0) % 2,820 bps
Interest expense 15,348 8,864 6,484 73.1 %
Interest income (225) (464) 239 51.5 %
Other (income) expense, net (917) 4,818 (5,735) nm
Income (loss) before income taxes 113,290 (91,696) 204,986 223.5 %
Income tax provision (benefit) 27,094 (13,002) 40,096 308.4 %
Effective tax rate(*) 23.9 % 14.2 % 970 bps
Net income (loss) $ 86,196 $ (78,694) $ 164,890 209.5 %
Basic net income (loss) per common
share $ 1.96 $ (1.82) $ 3.78 207.7 %
Diluted net income (loss) per common
share $ 1.96 $ (1.82) $ 3.78 207.7 %
Dividend declared and paid per common
share $ - $ 0.60 $ (0.60) (100.0) %
(*)Effective tax rate is calculated by dividing the provision (benefit) for
income taxes by income (loss) before income taxes.
Note: Results may not be additive due to rounding. Percentage changes that are
not considered meaningful are denoted with "nm".
Consolidated Net Sales
Consolidated net sales increased $132.9 million , or 20.3%, to $787.4 million in
the first quarter of fiscal 2021. This increase was primarily driven by
increased net sales through our eCommerce channel, increased retail store
traffic, increased demand with certain of our wholesale customers, and increased
average selling prices per unit. We believe that this increase in demand was
driven by the strong consumer reaction to our Spring product offerings, and
demand improved meaningfully following the passage of the pandemic relief
legislation in March 2021 . The first quarter of fiscal 2020 was adversely
impacted by the closure of our retail stores in March 2020 and reduced demand as
a result of disruptions related to COVID-19. Changes in foreign currency
exchange rates used for translation in the first quarter of fiscal 2021, as
compared to the first quarter of fiscal 2020, had a favorable effect on our
consolidated net sales of approximately $3.1 million .
Gross Profit and Gross Margin
Our consolidated gross profit increased $163.7 million , or 71.7%, to $392.0
million in the first quarter of fiscal 2021. Consolidated gross margin increased
1,490 bps to 49.8% in the first quarter of fiscal 2021.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Gross profit is calculated as consolidated net sales less cost of goods sold
less adverse purchase commitments, net, and gross margin is calculated as gross
profit divided by consolidated net sales. Cost of goods sold include expenses
related to the merchandising, design, and procurement of product, including
inbound freight costs, purchasing and receiving costs, and inspection costs.
Also included in costs of goods sold are the costs of shipping eCommerce product
to end consumers. Retail store occupancy costs, distribution expenses, and
generally all other expenses other than interest and income taxes are included
in SG&A. Distribution expenses that are included in SG&A primarily consist of
payments to third-party shippers and handling costs to process product through
our distribution facilities, including eCommerce fulfillment costs, and delivery
to our wholesale customers and to our retail stores. Accordingly, our gross
profit and gross margin may not be comparable to other entities that define
their metrics differently.
The increase in consolidated gross profit and gross margin was primarily driven
by higher consolidated net sales across our businesses segments, increased
average selling prices per unit, decreased product costs, decreased excess
inventory provisions and a benefit in fabric purchase commitment charges related
to better than expected sales of inventory and utilization of fabric that were
reserved for in the first quarter of fiscal 2020. Gross margin in the first
quarter of fiscal 2020 was adversely impacted by incremental inventory related
charges of $48.7 million , inclusive of $22.8 million in adverse inventory and
fabric purchase commitments, primarily from disruptions related to COVID-19.
Selling, General, and Administrative Expenses
Consolidated SG&A expenses increased $2.1 million , or 0.8%, to $271.9 million in
the first quarter of fiscal 2021 and decreased as a percentage of consolidated
net sales by approximately 670 bps to 34.5%. This decrease in SG&A rate was
primarily driven by increased consolidated net sales, better leverage of retail
store expenses due to more stores being open throughout the first quarter of
fiscal 2021 compared to the first quarter of fiscal 2020, decreased
organizational restructuring charges, decreased costs associated with the
COVID-19 pandemic, decreased marketing costs, decreased bad debt expense, and
decreased information technology related costs, partially offset by increased
performance-based compensation expense and increased costs related to
productivity initiatives.
Goodwill Impairment
During the first quarter of fiscal 2020, the Company's market capitalization
declined, and actual and projected sales and profitability decreased as a result
of disruptions related to COVID-19. Based on these events, we concluded that a
triggering event occurred, and we performed an interim quantitative impairment
test as of March 28, 2020 . Based upon the results of the impairment test, we
recognized a non-cash goodwill impairment charge of $17.7 million during the
first quarter of fiscal 2020 which was recorded to the Other International
reporting unit in the International segment.
Intangible Asset Impairment
In the first quarter of fiscal 2020, the Company recorded non-cash impairment
charges of $15.5 million and $11.0 million related to its OshKosh and Skip Hop
tradename assets, respectively, that were recorded in connection with the
acquisition of OshKosh B'Gosh, Inc. in July 2005 and Skip Hop Holdings, Inc. in
February 2017 . The impairment reflected lower-than-expected actual sales, and
lower projected sales and profitability due to decreased demand as a result of
disruptions related to COVID-19.
Operating Income (Loss)
Consolidated operating income was $127.5 million in the first quarter of fiscal
2021 compared to an operating loss of $78.5 million in the first quarter of
fiscal 2020. Consolidated operating margin increased 2,820 bps to 16.2% in the
first quarter of fiscal 2021 primarily due to the factors discussed above.
Interest Expense
Interest expense increased $6.5 million , or 73.1%, to $15.3 million in the first
quarter of fiscal 2021. Weighted-average borrowings for the first quarter of
fiscal 2021 were $1.00 billion at an effective interest rate of 6.05%, compared
to weighted-average borrowings for the first quarter of fiscal 2020 of $632.3
million at an effective interest rate of 5.46%.
The increase in weighted-average borrowings during the first quarter of fiscal
2021 was attributable to the issuance of $500 million in principal amount of
senior notes in May 2020 , partially offset by the absence of borrowings under
our secured revolving credit facility during the first quarter of 2021. The
increase in the effective interest rate for the first quarter of fiscal 2021 was
primarily due to the absence of borrowings under our secured revolving credit
facility, which bore a lower interest rate than our senior notes, during the
first quarter of fiscal 2021.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Other (Income) Expense, Net
Other (income) expense, net was $(0.9) million in the first quarter of fiscal
2021 compared to $4.8 million in the first quarter of fiscal 2020. This
difference was primarily due to a foreign exchange loss on intercompany loans in
the first quarter of fiscal 2020 related to the strengthening of the U.S. dollar
that did not reoccur in the first quarter of fiscal 2021.
Income Taxes
Our consolidated income tax provision was $27.1 million in the first quarter of
fiscal 2021 compared to a $13.0 million income tax benefit in the first quarter
of fiscal 2020. Our effective tax rate was 23.9% in the first quarter of fiscal
2021 compared to 14.2% in the first quarter of fiscal 2020. The effective tax
rate for the first quarter of fiscal 2021 reflects our full year expectations
regarding the components of our taxable income by jurisdiction, with the
majority of the income earned in the U.S. under existing U.S. tax legislation.
The effective tax rate for the first quarter of fiscal 2020 reflected the impact
of goodwill impairments with no corresponding tax benefit, our full year
expectations regarding components of our taxable income by jurisdictions due to
significant disruption in the worldwide economy from COVID-19 which reduced our
pre-tax income in the U.S. and by the increase in tax benefits related to the
vesting of stock awards in the first quarter of fiscal 2020.
Net Income (Loss)
Consolidated net income was $86.2 million in the first quarter of fiscal 2021
compared to a net loss of $78.7 million in the first quarter of fiscal 2020,
primarily due to the factors previously discussed.
Results by Segment - First Quarter of Fiscal 2021 compared to First Quarter of
Fiscal 2020
The following table summarizes net sales and operating income (loss), by
segment, for the first quarter of fiscal 2021 and the first quarter of fiscal
2020:
Fiscal quarter ended
% of consolidated % of consolidated
(dollars in thousands) April 3, 2021 net sales March 28, 2020 net sales $ Change % Change
Net sales:
U.S. Retail $ 407,067 51.7 % $ 320,717 49.0 % $ 86,350 26.9 %
U.S. Wholesale 283,377 36.0 % 252,130 38.5 % 31,247 12.4 %
International 96,917 12.3 % 81,626 12.5 % 15,291 18.7 %
Consolidated net sales $ 787,361 100.0 % $ 654,473 100.0 % $ 132,888 20.3 %
% of segment net % of segment net
Operating income (loss): sales sales
U.S. Retail $ 76,521 18.8 % $ (32,376) (10.1) % $ 108,897 336.4 %
U.S. Wholesale 70,058 24.7 % 2,231 0.9 % 67,827 3,040.2 %
International 9,734 10.0 % (27,705) (33.9) % 37,439 135.1 %
Unallocated corporate expenses (28,817) n/a (20,628) n/a (8,189) (39.7) %
Consolidated operating income
(loss) $ 127,496 16.2 % $ (78,478) (12.0) % $ 205,974 262.5 %
Comparable Sales Metrics
As a result of the temporary store closures in the first quarter of fiscal 2020
in response to COVID-19, we have not included a discussion of the first quarter
of fiscal 2021 retail comparable sales as we do not believe it is a meaningful
metric during the period.
U.S. Retail
U.S. Retail segment net sales increased $86.4 million , or 26.9%, to $407.1
million in the first quarter of fiscal 2021. The increase in net sales was
primarily driven by increased eCommerce sales, increased retail store traffic
due to more stores being open throughout the first quarter of fiscal 2021
compared to the first quarter of fiscal 2020 as the Company recovered from
business disruptions related to COVID-19, and increased average selling prices
per unit as a result of decreased promotions. U.S. eCommerce net sales increased
38.0% during the first quarter of fiscal 2021 compared to the first quarter of
fiscal 2020. As of April 3, 2021 , we operated 804 retail stores in the U.S.
compared to 864 as of January 2, 2021 . The decrease in store
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
count in the first quarter of fiscal 2021 relates to our announced plans to
close over 100 retail stores that are primarily unprofitable and in less
trafficked shopping centers, by the end of fiscal 2021.
U.S. Retail segment operating income was $76.5 million in the first quarter of
fiscal 2021 compared to an operating loss of $32.4 million in the first quarter
of fiscal 2020. Operating margin increased 2,890 bps to 18.8% in the first
quarter of fiscal 2021. Operating loss in the first quarter of fiscal 2020
included intangible asset impairment charges of $13.6 million and $0.5 million
related to the OshKosh and Skip Hop tradenames, respectively. The primary
drivers of the increase in operating margin were a 1,150 bps increase in gross
margin, a 1,290 bps decrease in SG&A rate, and the intangible asset impairment
charges in the first quarter of fiscal 2020 that did not reoccur in the first
quarter of fiscal 2021. The increase in gross margin was primarily due to
increased average selling prices per unit, decreased product costs, decreased
excess inventory provisions, and a benefit in fabric purchases commitment
charges related to better than expected sales of inventory and utilization of
fabric that were reserved for in the first quarter of fiscal 2020, partially
offset by unfavorable shipping costs. The decrease in SG&A rate was primarily
due to increased net sales, better leverage of retail store expenses due to
increased store traffic, decreased marketing costs, and decreased organizational
restructuring expenses, partially offset by increased performance-based
compensation expense.
U.S. Wholesale
U.S. Wholesale segment net sales increased $31.2 million , or 12.4%, to $283.4
million in the first quarter of fiscal 2021 primarily due to increased demand in
our exclusive Carter's brands, increased shipments to other wholesale customers
as these customers recovered from business disruptions in the first quarter of
fiscal 2020 as a result of COVID-19, and increased average selling prices per
unit.
U.S. Wholesale segment operating income increased $67.8 million to $70.1 million
in the first quarter of fiscal 2021. Operating margin increased 2,380 bps to
24.7% in the first quarter of fiscal 2021. Operating income in the first quarter
of fiscal 2020 included intangible asset impairment charges of $6.8 million and
$1.6 million related to the Skip Hop and OshKosh tradenames, respectively. The
primary drivers of the increase in operating margin were a 1,930 bps increase in
gross margin, a 150 bps decrease in SG&A rate, and the intangible asset
impairment charges in the first quarter of fiscal 2020 that did not reoccur in
the first quarter of fiscal 2021. The increase in gross margin was primarily due
to decreased excess inventory provisions, a benefit in fabric purchase
commitment charges related to better than expected sales of inventory and
utilization of fabric that were reserved for in the first quarter of fiscal
2020, and increased average selling prices per unit. The decrease in the SG&A
rate was primarily due to increased sales, decreased bad debt expense, and
decreased selling expenses, partially offset by increased performance-based
compensation expense.
International
International segment net sales increased $15.3 million , or 18.7%, to $96.9
million in the first quarter of fiscal 2021. Changes in foreign currency
exchange rates, primarily between the U.S. dollar and the Canadian dollar, had a
$3.1 million favorable effect on International segment net sales in the first
quarter of fiscal 2021. The increase in net sales was primarily driven by growth
in our Canadian and Mexican eCommerce business, increased retail store traffic
in Canada and Mexico due to more stores being open throughout the first quarter
of fiscal 2021 compared to the first quarter of fiscal 2020 as the Company
recovered from business disruptions related to COVID-19 and increased sales to
our international wholesale accounts.
Canadian eCommerce net sales increased 143.7% during the first quarter of fiscal
2021 compared to the first quarter of fiscal 2020. As of April 3, 2021 , we
operated 189 and 43 retail stores in Canada and Mexico respectively, compared to
193 and 44 as of January 2, 2021 . In April 2021 , and subsequent to the first
quarter of fiscal 2021, we temporarily closed approximately 100 retail stores in
Canada in accordance with regulations put in place by the local governments as a
result of rising COVID-19 cases. We plan to reopen the majority of these stores
by the middle of May 2021 , subject to safety considerations resulting from the
progression of COVID-19 related laws and regulations put in place by the local
governments.
International segment operating income was $9.7 million in the first quarter of
fiscal 2021 compared to an operating loss of $27.7 million in the first quarter
of fiscal 2020. Operating margin increased 4,390 bps to 10.0% in the first
quarter of fiscal 2021. Operating loss in the first quarter of fiscal 2020
included a $17.7 million goodwill impairment charge recorded to the Other
International reporting unit, a $3.7 million intangible asset impairment charge
related to the Skip Hop tradename, and a $0.3 million intangible asset
impairment charge related to the OshKosh tradename. The increase in the
operating margin was primarily attributable to a 840 bps increase in gross
margin, a 920 bps decrease in the SG&A rate, and the goodwill and intangible
asset impairment charges in the first quarter of fiscal 2020 that did not
reoccur in the first quarter of fiscal 2021. The increase in gross margin was
primarily due to decreased excess inventory provisions, a benefit in fabric
purchase commitment charges related to better than expected sales of inventory
and utilization of fabric that were reserved for in the first quarter of
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
fiscal 2020, and increased average selling prices per unit. The decrease in the
SG&A rate was primarily due to better leverage of retail store expenses due to
increased store traffic, decreased bad debt expense, decreased marketing costs,
and other reductions in costs, partially offset by increased performance-based
compensation expense and increased eCommerce distribution and fulfillment costs
due to an increase in eCommerce demand.
Unallocated Corporate Expenses
Unallocated corporate expenses increased $8.2 million , or 39.7%, to $28.8
million in the first quarter of fiscal 2021. Unallocated corporate expenses, as
a percentage of consolidated net sales, increased 50 bps to 3.7% in the first
quarter of fiscal 2021. The increase as a percentage of consolidated net sales
was primarily due to increased performance-based compensation expense and
increased costs related to productivity initiatives, partially offset by
decreased information technology related costs and decreased corporate occupancy
costs.
FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY
Our ongoing cash needs are primarily for working capital and capital
expenditures. We expect that our primary sources of liquidity will be cash and
cash equivalents on hand, cash flow from operations, and available borrowing
capacity under our secured revolving credit facility. These sources of liquidity
may be affected by events described in our risk factors, as further discussed
under the heading "Risk Factors" in our most recently filed Annual Report on
Form 10-K and in other reports filed with the Securities and Exchange Commission
from time to time.
As of April 3, 2021 , we had $1.05 billion of cash and cash equivalents held at
major financial institutions, including approximately $82.5 million held at
financial institutions located outside of the United States . We maintain cash
deposits with major financial institutions that exceed the insurance coverage
limits provided by the Federal Deposit Insurance Corporation in the United
States and by similar insurers for deposits located outside the United States .
To mitigate this risk, we utilize a policy of allocating cash deposits among
major financial institutions that have been evaluated by us and third-party
rating agencies as having acceptable risk profiles.
Balance Sheet
Net accounts receivable at April 3, 2021 were $240.2 million compared to $221.9
million at March 28, 2020 and $186.5 million at January 2, 2021 . The overall
increase of $18.4 million , or 8.3%, at April 3, 2021 compared to March 28, 2020
primarily reflects increased customer demand. Due to the seasonal nature of our
operations, the net accounts receivable balance at April 3, 2021 is not
comparable to the net accounts receivable balance at January 2, 2021 .
Inventories at April 3, 2021 were $560.7 million compared to $565.9 million at
March 28, 2020 and $599.3 million at January 2, 2021 . The decrease of $5.3
million , or 0.9%, at April 3, 2021 compared to March 28, 2020 is primarily the
result of our lean inventory strategy, partially offset by increased customer
demand. Due to the seasonal nature of our operations, the inventories balance at
April 3, 2021 is not comparable to the inventories balance at January 2, 2021 .
Accounts payable at April 3, 2021 were $334.8 million compared to $187.2 million
at March 28, 2020 and $472.1 million at January 2, 2021 . The increase of $147.7
million , or 78.9%, at April 3, 2021 compared to March 28, 2020 is primarily due
to the timing of cash payments and change in terms to certain of our vendors.
Due to the seasonal nature of our operations, the accounts payable balance at
April 3, 2021 is not comparable to the accounts payable balance at January 2,
2021 .
Cash Flow
Net Cash Used in Operating Activities
Net cash used in operating activities for the first quarter of fiscal 2021 was
$39.5 million compared to $14.3 million in the first quarter of fiscal 2020. Our
cash flow provided by operating activities is dependent on net income and
changes in our working capital. The increase in net cash used in operating
activities for the first quarter of fiscal 2021 was primarily due to a decrease
in payment terms to certain of our vendors and due to the payment of deferred
retail store rents from fiscal 2020, partially offset by increased net sales.
Operating cash flow is expected to be unfavorably impacted in fiscal 2021 due to
a decrease in payment terms to certain of our vendors and due to the payment of
deferred retail store rents from fiscal 2020.
Net Cash Used in Investing Activities
Net cash used in investing activities for the first quarter of fiscal 2021 was
$6.7 million compared to $8.1 million in the first quarter of fiscal 2020. The
decrease in net cash used in investing activities for the first quarter of
fiscal 2021 is primarily due to
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
the proceeds from the sale of investments in marketable securities, partially
offset by an increase in capital expenditures. Capital expenditures in the first
quarter of fiscal 2021 primarily included $6.1 million for information
technology initiatives, $3.7 million for our U.S. and international retail store
openings and remodelings, and $1.5 million for our distribution facilities.
We plan to invest approximately $50.0 million in capital expenditures in fiscal
2021, which primarily relates to strategic information technology initiatives,
U.S. and international retail store openings and remodels, investments to
strengthen our omni-channel capabilities, and distribution facility initiatives.
Net Cash Used in (Provided by) Financing Activities
Net cash used in financing activities was $2.8 million in the first quarter of
fiscal 2021 compared to net cash provided by financing activities of $569.6
million in the first quarter of fiscal 2020. This change in cash flow from
financing activities was primarily due to drawing on substantially all of our
secured revolving credit facility to improve near-term liquidity in light of the
uncertainty and disruption related to COVID-19 in the first quarter of fiscal
2020, which did not reoccur in the first quarter of fiscal 2021.
Secured Revolving Credit Facility
As of April 3, 2021 , we had no outstanding borrowings under our secured
revolving credit facility, exclusive of $5.0 million of outstanding letters of
credit. As of April 3, 2021 , there was approximately $745.0 million available
for future borrowing. All outstanding borrowings under our secured revolving
credit facility are classified as non-current liabilities on our consolidated
balance sheets due to contractual repayment terms under the credit facility.
However, these repayment terms also allow us to repay some or all of the
outstanding borrowings at any time.
As of April 3, 2021 , the interest rate margins applicable to the secured
revolving credit facility were 1.625% for LIBOR rate and 0.625% for base rate
loans.
In the first quarter of fiscal 2021, there were no changes in our financial and
other covenants under the secured revolving credit facility as described in our
Form 10-K for the 2020 fiscal year ended January 2, 2021 .
On April 21, 2021 , through our wholly owned subsidiary, The William Carter
Company ("TWCC"), we entered into Amendment No. 3 to our fourth amended and
restated credit agreement ("Amendment No. 3"). Among other things, Amendment No.
3 provides that through the remainder of the Restricted Period, which ends on
the date the Company delivers its financial statements and associated
certificates relating to the third fiscal quarter of 2021:
•we must maintain a minimum liquidity (defined as cash-on-hand plus availability
under the secured revolving credit facility) on the last day of each fiscal
month of at least $950 million (the "Revised Liquidity Requirement"), which was
increased by $250 million from $700 million ; and
•we may make additional restricted payments, including to pay cash dividends and
repurchase common stock, in an amount not to exceed $250 million , provided that
(a) no default or event of default will have occurred and be continuing or would
result from the payment and (b) after giving effect to the payment, we would
have been in compliance with Revised Liquidity Requirement as of the last day of
the most recent month.
Senior Notes
As of April 3, 2021 , the Company had outstanding $500 million principal amount
of senior notes at par, bearing interest at a rate of 5.625% per annum, and
maturing on March 15, 2027 , and $500 million principal amount of senior notes at
par, bearing interest at a rate of 5.500% per annum, and maturing on May 15,
2025 .
Share Repurchases
In the first quarter of fiscal 2021, we did not repurchase or retire any shares
in open market transactions. In the first quarter of fiscal 2020, we repurchased
and retired 474,684 shares in open market transactions for approximately $45.3
million , at an average price of $95.34 per share.
The total remaining capacity under all remaining repurchase authorizations as of
April 3, 2021 was approximately $650.4 million , based on settled repurchase
transactions. The share repurchase authorizations have no expiration dates.
In the first quarter of fiscal 2020, we announced that, in connection with the
COVID-19 pandemic, we suspended our common stock share repurchase program. While
we may elect to resume purchases at any time, the timing and amount of any
future
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
repurchases will be determined by the Company based on its evaluation of market
conditions, share price, and other investment priorities.
Dividends
In the first quarter of fiscal 2020, we paid quarterly cash dividends of $0.60
per share. On May 1, 2020 , in connection with the COVID-19 pandemic, we
suspended our quarterly cash dividend. As a result, the Company did not declare
or pay cash dividends for the first quarter of fiscal 2021.
On April 27, 2021 , in connection with the announcement of the amendment on our
revolving credit facility, our Board of Directors authorized a quarterly cash
dividend payment of $0.40 per common share, payable on May 28, 2021 , to
shareholders of record at the close of business on May 12, 2021 . Our Board of
Directors will evaluate future dividend declarations based on a number of
factors, including restrictions under our revolving credit facility, business
conditions, our financial performance, and other considerations.
Provisions in our secured revolving credit facility could have the effect of
restricting our ability to pay cash dividends, or make future repurchases of,
our common stock, as further described in Note 8, Long-term Debt, to the
consolidated financial statements.
Seasonality
We experience seasonal fluctuations in our sales and profitability due to the
timing of certain holidays and key retail shopping periods, which generally has
resulted in lower sales and gross profit in the first half of our fiscal year
versus the second half of the fiscal year. Accordingly, our results of
operations during the first half of the year may not be indicative of the
results we expect for the full year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America . The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses, and related disclosure of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Our critical accounting policies and estimates are described under the heading
"Critical Accounting Policies and Estimates" in Item 7 of our most recent Annual
Report on Form 10-K for the 2020 fiscal year ended January 2, 2021 . Our critical
accounting policies and estimates are those policies that require management's
most difficult and subjective judgments and may result in the need to make
estimates about the effect of matters that are inherently uncertain. Our
critical accounting policies and estimates include: revenue recognition and
accounts receivable allowance, inventory, goodwill and tradename, accrued
expenses, loss contingencies, accounting for income taxes, foreign currency,
employee benefit plans, and stock-based compensation arrangements. There have
been no material changes in these critical accounting policies and estimates
from those described in our most recent Annual Report on Form 10-K.
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