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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2020
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to         
Commission file number:
001-31829
CARTER’S, INC.
(Exact name of Registrant as specified in its charter)                            
Delaware
 
13-3912933
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 

Phipps Tower,
3438 Peachtree Road NE, Suite 1800
Atlanta, Georgia 30326
(Address of principal executive offices, including zip code)
(678) 791-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common stock, par value $0.01 per share
CRI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes No x
As of July 17, 2020, there were 43,635,081 shares of the registrant's common stock outstanding.








CARTER’S, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of June 27, 2020, December 28, 2019 and June 29, 2019
 
 
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and two fiscal quarters ended June 27, 2020 and June 29, 2019
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the fiscal quarter and two fiscal quarters ended June 27, 2020 and June 29, 2019
 
 
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity for the fiscal quarters ended June 27, 2020, March 28, 2020, June 29, 2019 and March 30, 2019
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the two fiscal quarters ended June 27, 2020 and June 29, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
 
June 27, 2020
 
December 28, 2019
 
June 29, 2019
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
1,000,581

 
$
214,311

 
$
118,458

Accounts receivable, net of allowance for credit losses of $9,242, $6,354, $3,786, respectively
165,578

 
251,005

 
168,176

Finished goods inventories, net of inventory reserves of $32,092, $9,283, and $14,119, respectively
672,205

 
593,987

 
697,559

Prepaid expenses and other current assets
51,180

 
48,454

 
56,813

Total current assets
1,889,544

 
1,107,757

 
1,041,006

Property, plant, and equipment, net of accumulated depreciation of $559,142, $523,848, and $486,319, respectively
287,941

 
320,168

 
333,600

Operating lease assets
648,505

 
687,024

 
705,631

Tradenames, net
308,017

 
334,642

 
365,567

Goodwill
208,573

 
229,026

 
228,860

Customer relationships, net
38,950

 
41,126

 
42,825

Other assets
31,104

 
33,374

 
29,671

Total assets
$
3,412,634

 
$
2,753,117

 
$
2,747,160

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
458,075

 
$
183,641

 
$
232,869

Current operating lease liabilities
163,665

 
160,228

 
154,719

Other current liabilities
80,634

 
131,631

 
85,483

Total current liabilities
702,374

 
475,500

 
473,071

 
 
 
 
 
 
Long-term debt, net
1,232,649

 
594,672

 
604,377

Deferred income taxes
63,850

 
74,370

 
91,190

Long-term operating lease liabilities
620,063

 
664,372

 
688,650

Other long-term liabilities
60,420

 
64,073

 
61,975

Total liabilities
$
2,679,356

 
$
1,872,987

 
$
1,919,263

 
 
 
 
 
 
Commitments and contingencies - Note 14

 

 

 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at June 27, 2020, December 28, 2019, and June 29, 2019
$

 
$

 
$

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 43,636,176, 43,963,103 and 44,868,563 shares issued and outstanding at June 27, 2020, December 28, 2019, and June 29, 2019, respectively
436

 
440

 
449

Additional paid-in capital
5,539

 

 

Accumulated other comprehensive loss
(45,045
)
 
(35,634
)
 
(36,561
)
Retained earnings
772,348

 
915,324

 
864,009

Total stockholders' equity
733,278

 
880,130

 
827,897

Total liabilities and stockholders' equity
$
3,412,634

 
$
2,753,117

 
$
2,747,160

See accompanying notes to the unaudited condensed consolidated financial statements.

1


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
 
Fiscal quarter ended
 
Two fiscal quarters ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
Net sales
$
514,885

 
$
734,384

 
$
1,169,357

 
$
1,475,442

Cost of goods sold
284,073

 
410,390

 
687,445

 
835,528

Adverse purchase commitments (inventory and raw materials)
(4,703
)
 
998

 
18,134

 
1,051

Gross profit
235,515

 
322,996

 
463,778

 
638,863

Royalty income, net
3,588

 
9,635

 
10,926

 
18,179

Selling, general, and administrative expenses
218,149

 
268,155

 
487,986

 
531,807

Goodwill impairment

 

 
17,742

 

Intangible asset impairment

 

 
26,500

 

Operating income (loss)
20,954

 
64,476

 
(57,524
)
 
125,235

Interest expense
15,312

 
9,072

 
24,176

 
18,701

Interest income
(423
)
 
(509
)
 
(887
)
 
(737
)
Other expense (income), net
587

 
202

 
5,405

 
(9
)
Loss on extinguishment of debt

 

 

 
7,823

Income (loss) before income taxes
5,478

 
55,711

 
(86,218
)
 
99,457

Income tax (benefit) provision
(2,678
)
 
11,774

 
(15,680
)
 
21,054

Net income (loss)
$
8,156

 
$
43,937

 
$
(70,538
)
 
$
78,403

 
 
 
 
 
 
 
 
Basic net income (loss) per common share
$
0.19

 
$
0.97

 
$
(1.64
)
 
$
1.73

Diluted net income (loss) per common share
$
0.19

 
$
0.97

 
$
(1.64
)
 
$
1.72

Dividend declared and paid per common share
$

 
$
0.50

 
$
0.60

 
$
1.00

See accompanying notes to the unaudited condensed consolidated financial statements.

2


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
(unaudited)
 
Fiscal quarter ended
 
Two fiscal quarters ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
Net income (loss)
$
8,156

 
$
43,937

 
$
(70,538
)
 
$
78,403

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
3,581

 
2,867

 
(9,411
)
 
5,778

Comprehensive income (loss)
$
11,737

 
$
46,804

 
$
(79,949
)
 
$
84,181

See accompanying notes to the unaudited condensed consolidated financial statements.

3


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands, except share amounts)
(unaudited)
 
Common stock - shares
 
Common
stock - $
 
Additional
paid-in
capital
 
Accumulated other comprehensive
loss
 
Retained
earnings
 
Total
stockholders’
equity
Balance at December 29, 2018
45,629,014

 
$
456

 
$

 
$
(40,839
)
 
$
909,816

 
$
869,433

Exercise of stock options
72,192

 
1

 
4,779

 

 

 
4,780

Withholdings from vesting
of restricted stock
(43,844
)
 

 
(4,077
)
 

 

 
(4,077
)
Restricted stock activity
182,722

 
2

 
(2
)
 

 

 

Stock-based compensation expense

 

 
4,613

 

 

 
4,613

Repurchase of common stock
(460,257
)
 
(5
)
 
(5,313
)
 

 
(34,648
)
 
(39,966
)
Cash dividends declared and paid

 

 

 

 
(22,756
)
 
(22,756
)
Comprehensive income

 

 

 
2,911

 
34,466

 
37,377

Reclassification of tax effects(*)

 

 

 
(1,500
)
 
1,500

 

Balance at March 30, 2019
45,379,827

 
$
454

 
$

 
$
(39,428
)
 
$
888,378

 
$
849,404

Exercise of stock options
26,264

 

 
1,566

 

 

 
1,566

Withholdings from vesting
of restricted stock
(505
)
 

 
(49
)
 

 

 
(49
)
Restricted stock activity
8,597

 

 

 

 

 

Stock-based compensation expense

 

 
5,194

 

 

 
5,194

Repurchase of common stock
(545,620
)
 
(5
)
 
(6,711
)
 

 
(45,761
)
 
(52,477
)
Cash dividends declared and paid

 

 

 

 
(22,545
)
 
(22,545
)
Comprehensive income

 

 

 
2,867

 
43,937

 
46,804

Balance at June 29, 2019
44,868,563

 
$
449

 
$

 
$
(36,561
)
 
$
864,009

 
$
827,897

(*)
The Company reclassified $1.5 million of tax benefits from "Accumulated other comprehensive loss" to "Retained earnings" for the tax effects resulting from the December 22, 2017 enactment of the Tax Cut and Jobs Act in accordance with the adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of fiscal 2019.
 
Common stock - shares
 
Common
stock - $
 
Additional
paid-in
capital
 
Accumulated other comprehensive
loss
 
Retained
earnings
 
Total
stockholders’
equity
Balance at December 28, 2019
43,963,103

 
$
440

 
$

 
$
(35,634
)
 
$
915,324

 
$
880,130

Exercise of stock options
33,158

 

 
1,840

 

 

 
1,840

Withholdings from vesting
of restricted stock
(43,611
)
 

 
(4,712
)
 

 

 
(4,712
)
Restricted stock activity
132,759

 
1

 
(1
)
 

 

 

Stock-based compensation expense

 

 
1,945

 

 

 
1,945

Repurchase of common stock
(474,684
)
 
(5
)
 
928

 

 
(46,178
)
 
(45,255
)
Cash dividends declared and paid

 

 

 

 
(26,260
)
 
(26,260
)
Comprehensive loss

 

 

 
(12,992
)
 
(78,694
)
 
(91,686
)
Balance at March 28, 2020
43,610,725

 
$
436

 
$

 
$
(48,626
)
 
$
764,192

 
$
716,002

Exercise of stock options
14,180

 

 
1,076

 

 

 
1,076

Withholdings from vesting
of restricted stock
(1,016
)
 

 
(77
)
 

 

 
(77
)
Restricted stock activity
12,287

 

 

 

 

 

Stock-based compensation expense

 

 
4,540

 

 

 
4,540

Comprehensive income

 

 

 
3,581

 
8,156

 
11,737

Balance at June 27, 2020
43,636,176

 
$
436

 
$
5,539

 
$
(45,045
)
 
$
772,348

 
$
733,278


See accompanying notes to the unaudited condensed consolidated financial statements

4


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 
Two fiscal quarters ended
 
June 27, 2020
 
June 29, 2019
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(70,538
)
 
$
78,403

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation of property, plant, and equipment
43,774

 
44,991

Amortization of intangible assets
1,858

 
1,874

Provisions for (recoveries of) excess and obsolete inventory
23,058

 
(938
)
Goodwill impairment
17,742

 

Intangible asset impairments
26,500

 

Other asset impairments and loss on disposal of property, plant and equipment, net of recoveries
7,332

 
385

Amortization of debt issuance costs
916

 
737

Stock-based compensation expense
6,485

 
9,807

Unrealized foreign currency exchange loss (gain), net
1,621

 
(142
)
Provisions for (recoveries of) doubtful accounts receivable from customers
3,036

 
(2,869
)
Loss on extinguishment of debt

 
7,823

Deferred income taxes (benefit) expense
(10,559
)
 
4,268

Effect of changes in operating assets and liabilities:
 
 
 
Accounts receivable
80,566

 
93,315

Finished goods inventories
(106,922
)
 
(119,508
)
Prepaid expenses and other assets
(852
)
 
(18,298
)
Accounts payable and other liabilities
214,796

 
4,617

Net cash provided by operating activities
$
238,813

 
$
104,465

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
$
(16,708
)
 
$
(24,992
)
Disposals and recoveries from property, plant, and equipment

 
749

Net cash used in investing activities
$
(16,708
)
 
$
(24,243
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from senior notes due 2025
$
500,000

 
$

Proceeds from senior notes due 2027

 
500,000

Payment of senior notes due 2021

 
(400,000
)
Premiums paid to extinguish debt

 
(5,252
)
Payment of debt issuance costs
(7,639
)
 
(5,793
)
Borrowings under secured revolving credit facility
644,000

 
80,000

Payments on secured revolving credit facility
(500,000
)
 
(166,000
)
Repurchases of common stock
(45,255
)
 
(92,443
)
Dividends paid
(26,260
)
 
(45,260
)
Withholdings from vestings of restricted stock
(4,789
)
 
(4,126
)
Proceeds from exercises of stock options
2,916

 
6,346

Net cash provided by (used in) financing activities
$
562,973

 
$
(132,528
)
 
 
 
 
Net effect of exchange rate changes on cash and cash equivalents
1,192

 
687

Net increase (decrease) in cash and cash equivalents
$
786,270

 
$
(51,619
)
Cash and cash equivalents, beginning of period
214,311

 
170,077

Cash and cash equivalents, end of period
$
1,000,581

 
$
118,458

See accompanying notes to the unaudited condensed consolidated financial statements.

5


CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY
Carter's, Inc. and its wholly owned subsidiaries (collectively, the "Company," "its," "us" and "our") design, source, and market branded childrenswear and accessories under the Carter's, OshKosh B'gosh ("OshKosh"), Skip Hop, Child of Mine, Just One You, Simple JoysPrecious Baby, Little Planet, and other brands. The Company's products are sourced through contractual arrangements with manufacturers worldwide for: 1) wholesale distribution to leading department stores, national chains, and specialty retailers domestically and internationally and 2) distribution to the Company's own retail stores and eCommerce sites that market its brand name merchandise and other licensed products manufactured by other companies.
NOTE 2BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission (the "SEC"). All intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, comprehensive income (loss), statement of stockholders' equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter ended June 27, 2020 are not necessarily indicative of the results that may be expected for the current fiscal year ending January 2, 2021.
The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
The accompanying condensed consolidated balance sheet as of December 28, 2019 was derived from the Company's audited consolidated financial statements included in its most recently filed Annual Report on Form 10-K. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q.
Revision of Previously Issued Financial Statements
During the second quarter of fiscal year 2020, it was determined that there were amounts presented incorrectly in the statement of cash flows for the annual and interim year to date periods subsequent to the December 30, 2018 adoption of ASC 842, Leases, due to the presentation of the non-cash impact of the initial and subsequent recognition of the Right of Use (“ROU”) assets and lease liabilities within the “Prepaid expenses and other assets” and “Accounts payable and other liabilities” line items, respectively, within operating cash flows. This incorrect presentation had no impact on net cash (used in) provided by operating activities for any of the periods. We assessed the materiality of the incorrect presentation and concluded that the previously issued financial statements were not materially misstated. The presentation errors resulted in an offsetting overstatement of cash used for prepaid expenses and other assets and cash provided by accounts payable and other liabilities of $739 million, $773 million and $815 million for the three, six and nine-months ended March 30, 2019, June 29, 2019 and September 28, 2019, respectively, $828 million for the year ended December 28, 2019 and $29 million for the three months ended March 28, 2020. The accompanying unaudited condensed consolidated statement of cash flows appropriately reflect the corrected presentation of these non-cash activities. In addition, the Company has reclassified and will reclassify prior comparable period amounts to present ROU asset amortization and lease liability payment activity on a net basis within the “Accounts payable and other liabilities” line item. The revisions to the nine months ended September 30, 2019, year ended December 31, 2019 and three months ended March 31, 2020 will be presented in future Forms 10-Q and 10-K filings. We will continue to provide supplemental noncash cash flow disclosure information in the notes to the financial statements, as well as correct for the omission of such disclosure during the 2019 interim periods in connection with our 2020 quarterly filings.

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

COVID-19
In December 2019, an outbreak of a new strain of coronavirus (“COVID-19”) began in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a pandemic and the President of the United States declared a national emergency. As a result of COVID-19, the Company temporarily closed its retail stores in North America and implemented several actions during fiscal 2020 to enhance liquidity and financial flexibility including the deferral of lease payments, reductions in discretionary spending, amending its revolving credit facility, issuing $500 million principal amount of senior notes, and suspending dividends and share repurchases.
Beginning in April 2020, the Company suspended rent payments under the leases for our temporarily closed stores in North America and has been in discussions with landlords to obtain rent concessions. The Company considered the Financial Accounting Standards Board's ("FASB") recent guidance regarding lease concessions as a result of the effects of the COVID-19 pandemic and has elected to treat these rent concessions as lease modifications. Lease modifications resulting from COVID-19 related rent concessions were not material to the financial statements for the fiscal quarter ended June 27, 2020. The Company has resumed making the required rent payments under the leases for the stores that reopened as of the end of the fiscal quarter. See Note 4, Leases, for further details on deferral of rent payments under these leases.
On May 4, 2020, the Company, through its wholly owned subsidiary, The William Carter Company ("TWCC"), successfully amended its revolving credit facility. This amendment provided for, among other things, a waiver of financial covenants through the balance of fiscal year 2020, revised covenant requirements through the third quarter of fiscal year 2021 and the ability to raise additional unsecured financing at the Company’s discretion. Additionally, on May 11, 2020, TWCC issued $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. See Note 8, Long-Term Debt, for further details on the amendment to the revolving credit facility and the issuance of $500 million principal amount of senior notes.
The Company announced in the first two quarters of fiscal 2020, that in connection with the COVID-19 pandemic, it suspended its common stock share repurchase program and its quarterly cash dividend. The Company's Board of Directors will evaluate future capital distributions, including dividend declarations, based on a number of factors, including business conditions, our financial performance, and other considerations.
The Company also assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of June 27, 2020 and through the date of this report filing. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory reserves, adverse inventory and fabric purchase commitments, stock based compensation, and the carrying value of our goodwill and other long-lived assets. Based on these assessments, in the second quarter of fiscal 2020, the Company recorded impairments on operating lease assets and other long-lived assets for our underperforming retail stores of $3.7 million, and a benefit in excess inventory and fabric purchase commitment charges of $9.9 million related to better than expected sales of inventory that was reserved for in the first fiscal quarter of 2020 due to COVID-19 related disruptions. For the two fiscal quarters ending June 27, 2020, the Company recorded impairments on operating lease assets and other long-lived assets for our underperforming retail stores of $5.0 million, inventory related charges of $23.1 million, adverse inventory and fabric purchase commitments of $18.1 million, intangible asset impairments of $26.5 million, and goodwill impairment of $17.7 million. There could be a further material impact to our consolidated financial statements in future reporting periods if at a future date we determine that these assessments of the magnitude and duration of COVID-19, as well as other factors, were incorrect.
Additional COVID-19 related charges in the second quarter of fiscal 2020 include incremental payroll continuation and employee related costs of $7.3 million, costs associated with additional protective equipment and cleaning supplies of $4.1 million, restructuring costs of $2.3 million, and other COVID-19-related costs of $1.1 million, as well as a payroll tax benefit of $1.8 million.
Accounting Policies
The accounting policies the Company follows are set forth in its most recently filed Annual Report on Form 10-K. There have been no material changes to these accounting policies. New accounting pronouncements adopted at the beginning of fiscal 2020 are noted below.
Credit Losses (ASU 2016-13)
At the beginning of fiscal 2020, the Company adopted Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This new

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

guidance changed how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 replaced the previous "incurred loss" model with an "expected loss" model, that requires an entity to recognize a loss (or allowance) upon initial recognition of the asset that reflects all future events that will lead to a loss being realized, regardless of whether it is probable that the future event will occur. The Company estimates current expected credit losses based on collection history and management’s assessment of the current economic trends, business environment, customers’ financial condition, accounts receivable aging, and customer disputes that may impact the level of future credit losses. The effect of the adoption of ASU 2016-13 was not material to the Company's consolidated financial statements.
Goodwill Impairment Testing (ASU 2017-04)
At the beginning of fiscal 2020, the Company adopted ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill (step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on the current step 1). Any impairment charge will be limited to the amount of goodwill allocated to an impacted reporting unit. ASU 2017-04 does not change the current guidance for completing step 1 of the goodwill impairment test, and an entity can still perform the current optional qualitative goodwill impairment assessment before determining whether to proceed to step 1. The effect of the adoption of ASU 2017-04 had no impact to the Company's consolidated financial statements. During the first quarter of fiscal 2020, the Company conducted an interim quantitative impairment assessment on the goodwill ascribed to the Other International reporting unit. As a result of this assessment and based on the application of ASU 2017-04, a goodwill impairment charge of $17.7 million was recorded to our Other International reporting unit. See Note 6, Goodwill and Intangible Assets, for further details on the impairment charge and valuation methodology.
Simplifying the Accounting for Income Taxes (Topic 740)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Amendments include removal of certain exceptions to the general principles of Topic 740, "Income Taxes," and simplification in several other areas. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, and interim periods therein, with early adoption permitted. The Company elected to early adopt this guidance in the first quarter of fiscal 2020. The Company retrospectively adopted the provision related to the classification of taxes partially based on income and has determined that the adoption of this standard did not have a material impact on its prior period financial statements. The provisions related to intra period tax allocation and interim recognition of enactment of tax laws are being adopted on a prospective basis. The effect of the adoption of ASU 2019-12 was not material to the Company's consolidated financial statements.
NOTE 3 - REVENUE RECOGNITION
The Company’s revenues are earned from contracts or arrangements with retail and wholesale customers and licensees. Contracts include written agreements as well as arrangements that are implied by customary practices or law.
Disaggregation of Revenue
The Company sells its products directly to consumers ("direct-to-consumer") and to other retail companies and partners that subsequently sell the products directly to their own retail customers. The Company also earns royalties from certain of its licensees. Disaggregated revenues from these sources for the second quarter and two quarters ended fiscal 2020 and 2019 were as follows:
 
 
Fiscal quarter ended June 27, 2020
(dollars in thousands)
 
U.S. Retail
 
U.S. Wholesale
 
International
 
Total
Wholesale channel
 
$

 
$
151,744

 
$
15,541

 
$
167,285

Direct-to-consumer
 
316,016

 

 
31,584

 
347,600

 
 
$
316,016

 
$
151,744

 
$
47,125

 
$
514,885

 
 
 
 
 
 
 
 
 
Royalty income
 
$
1,252

 
$
1,508

 
$
828

 
$
3,588


8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)




 
 
Two fiscal quarters ended June 27, 2020
(dollars in thousands)
 
U.S. Retail
 
U.S. Wholesale
 
International
 
Total
Wholesale channel
 
$

 
$
403,874

 
$
54,272

 
$
458,146

Direct-to-consumer
 
636,733

 

 
74,478

 
711,211

 
 
$
636,733

 
$
403,874

 
$
128,750

 
$
1,169,357

 
 
 
 
 
 
 
 
 
Royalty income
 
$
3,746

 
$
5,590

 
$
1,590

 
$
10,926

 
 
Fiscal quarter ended June 29, 2019
(dollars in thousands)
 
U.S. Retail
 
U.S. Wholesale
 
International
 
Total
Wholesale channel
 
$

 
$
229,091

 
$
24,742

 
$
253,833

Direct-to-consumer
 
423,128

 

 
57,423

 
480,551

 
 
$
423,128

 
$
229,091

 
$
82,165

 
$
734,384

 
 
 
 
 
 
 
 
 
Royalty income
 
$
4,452

 
$
4,162

 
$
1,021

 
$
9,635

 
 
Two fiscal quarters ended June 29, 2019
(dollars in thousands)
 
U.S. Retail
 
U.S. Wholesale
 
International
 
Total
Wholesale channel
 
$

 
$
504,458

 
$
65,530

 
$
569,988

Direct-to-consumer
 
800,182

 

 
105,272

 
905,454

 
 
$
800,182

 
$
504,458

 
$
170,802

 
$
1,475,442

 
 
 
 
 
 
 
 
 
Royalty income
 
$
6,443

 
$
10,012

 
$
1,724

 
$
18,179


Accounts Receivable from Customers and Licensees
The components of Accounts receivable, net, were as follows:
(dollars in thousands)
 
June 27, 2020
 
December 28, 2019
 
June 29, 2019
Trade receivables from wholesale customers, net(*)
 
$
159,043

 
$
239,059

 
$
156,256

Royalties receivable
 
5,371

 
6,982

 
8,469

Tenant allowances and other receivables
 
15,188

 
16,247

 
12,273

Total gross receivables
 
$
179,602

 
$
262,288

 
$
176,998

Less:
 
 
 
 
 
 
Wholesale accounts receivable reserves
 
(14,024
)
 
(11,283
)
 
(8,822
)
Accounts receivable, net(*)
 
$
165,578

 
$
251,005

 
$
168,176


(*)
The Company reclassified $1.7 million and $1.6 million of customer support related items from Wholesale accounts receivable reserves into Trade receivables from wholesale customers, net for the periods ended December 28, 2019 and June 29, 2019, respectively.
Contract Assets and Liabilities
The Company's contract assets are not material.

9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Contract Liabilities
The Company recognizes a contract liability when it has received consideration from a customer and has a future obligation to transfer goods to the customer. Total contract liabilities consisted of the following amounts:        
(dollars in thousands)
June 27, 2020
 
December 28, 2019
 
June 29, 2019
Contract liabilities - current:


 


 
 
Unredeemed gift cards
$
15,667

 
$
17,563

 
$
13,804

Unredeemed customer loyalty rewards
4,664

 
5,615

 
5,610

Carter's credit card - upfront bonus(1)
714

 
714

 
714

Total contract liabilities - current(2)
$
21,045

 
$
23,892

 
$
20,128

(1)
Carter's credit card - upfront bonus - the Company received an upfront signing bonus from a third-party financial institution, which will be recognized as revenue on a straight-line basis over the term of the agreement. This amount reflects the current portion of this bonus to be recognized as revenue over the next twelve months.
(2)
Included with Other current liabilities on the Company's consolidated balance sheets.
NOTE 4 - LEASES
We have operating leases for retail stores, distribution centers, corporate offices, data centers, and certain equipment. The Company's leases generally have initial terms ranging from 1 year to 10 years, some of which may include options to extend the leases for up to 5 years, and some of which may include options to early terminate the lease.
As of June 27, 2020, the Company's finance leases were not material to the consolidated balance sheets, consolidated statements of operations, or statements of cash flows.
As a result of the COVID-19 pandemic, the Company suspended rent payments under the leases for our temporarily closed stores in North America. The Company has continued to recognize expense and has established an accrual for the fixed rent payments that were not made. As of June 27, 2020, the Company accrued $35.8 million in fixed rent payments. The accrued rent was included within accounts payable on the Company's consolidated balance sheets. The Company has resumed making the required rent payments under the leases for the stores that reopened as of the end of the fiscal quarter.
In the second quarter and first two quarters of fiscal 2020, the Company recorded operating lease asset impairment charges totaling $3.2 million and $4.7 million, respectively related to underperforming stores primarily as a result of decreased net revenues and cash flow projections resulting from the COVID-19 disruption and other facility and office closures. See Note 11, Fair Value Measurements, for further details on the fair value calculations for operating lease assets for the retail stores.
The following components of lease expense are included in Selling, general and administrative expenses on the Company's consolidated statements of operations for the second quarter and first two quarters of fiscal 2020 and 2019:
 
 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in thousands)
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
Operating lease cost
 
$
45,527

 
$
44,688

 
$
91,950

 
$
87,907

Variable lease cost (*)
 
19,219

 
14,753

 
35,504

 
31,201

Net lease cost
 
$
64,746

 
$
59,441

 
$
127,454

 
$
119,108

(*)
Includes short-term leases, which are immaterial, and operating lease asset impairment charges
Supplemental balance sheet information related to leases was as follows:
 
 
Fiscal quarter ended
 
 
June 27, 2020
 
June 29, 2019
Weighted average remaining operating lease term (years)
 
5.7
 
6.2
Weighted average discount rate for operating leases
 
3.95%
 
4.45%

Cash paid for amounts included in the measurement of operating lease liabilities in the second quarter and first two quarters of fiscal 2020 was $47.6 million and $97.8 million, respectively. The total cash paid reflects the contractual amounts due to be

10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

paid in cash. For the fiscal quarter ended June 27, 2020, the Company deferred cash payments of $35.8 million of these amounts, which are included in the statement of cash flows as part of the change in Accounts payable and other liabilities.
Cash paid for amounts included in the measurement of operating lease liabilities in the second quarter and two quarters of fiscal 2019 was $47.9 million and $95.2 million, respectively.
Non-cash transactions to recognize operating assets and liabilities for the second quarter and first two quarters of fiscal 2020 were $15.8 million and $45.2 million, respectively. Non-cash transactions to recognize operating assets and liabilities for the second quarter and first two quarters of fiscal 2019 were $34.4 million and $54.4 million, respectively.
As of June 27, 2020, the maturities of lease liabilities were as follows:
(dollars in thousands)
Operating leases
Remainder of 2020
$
96,877

2021
183,977

2022
157,716

2023
130,122

2024
105,001

After 2024
203,133

Total lease payments
$
876,826

Less: Interest
(93,098
)
Present value of lease liabilities(*)
$
783,728

(*)
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. We used the incremental borrowing rate on December 30, 2018, for operating leases that commenced prior to that date.
As of June 27, 2020, the minimum rental commitments for additional operating lease contracts that have not yet commenced, primarily for retail stores, are $12.6 million. These operating leases will commence between fiscal year 2020 and fiscal year 2023 with lease terms of 6 years to 10 years.
NOTE 5ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of Accumulated other comprehensive loss consisted of the following:
(dollars in thousands)
June 27, 2020
 
December 28, 2019
 
June 29, 2019
Cumulative foreign currency translation adjustments
$
(35,933
)
 
$
(26,522
)
 
$
(27,186
)
Pension and post-retirement obligations(*)
(9,112
)
 
(9,112
)
 
(9,375
)
Total accumulated other comprehensive loss
$
(45,045
)
 
$
(35,634
)
 
$
(36,561
)

(*)
Net of income taxes of $2.8 million, $2.8 million, and $2.9 million for the period ended June 27, 2020, December 28, 2019, and June 29, 2019, respectively.
During the first two quarters of both fiscal 2020 and fiscal 2019, no amounts were reclassified from Accumulated other comprehensive loss to the statement of operations.

11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6GOODWILL AND INTANGIBLE ASSETS
The balances and changes in the carrying amount of goodwill attributable to each segment were as follows:
(dollars in thousands)
U.S. Retail
 
U.S. Wholesale
 
International
 
Total
Balance at December 29, 2018
$
83,934

 
$
74,454

 
$
68,713

 
$
227,101

Foreign currency impact

 

 
1,759

 
1,759

Balance at June 29, 2019
$
83,934

 
$
74,454

 
$
70,472

 
$
228,860

 
 
 
 
 
 
 
 
Balance at December 28, 2019
$
83,934

 
$
74,454

 
$
70,638

 
$
229,026

Goodwill impairment(*)

 

 
(17,742
)
 
(17,742
)
Foreign currency i