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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 July 1, 2023
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 ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common stock, par value $0.01 per shareCRINew 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 21, 2023, there were 37,258,307 shares of the registrant’s common stock outstanding.



CARTER’S, INC.
INDEX
Page
Unaudited Condensed Consolidated Balance Sheets as of July 1, 2023, December 31, 2022 and July 2, 2022
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and two fiscal quarters ended July 1, 2023 and July 2, 2022
Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and two fiscal quarters ended July 1, 2023 and July 2, 2022
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the fiscal quarters ended July 1, 2023, April 1, 2023, July 2, 2022 and April 2, 2022
Unaudited Condensed Consolidated Statements of Cash Flows for the two fiscal quarters ended July 1, 2023 and July 2, 2022
Part II. Other Information
Certifications




PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
July 1, 2023December 31, 2022July 2, 2022
ASSETS
Current assets:
Cash and cash equivalents$174,503 $211,748 $231,339 
Accounts receivable, net of allowance for credit losses of $3,849, $7,189, and $5,758, respectively
132,679 198,587 183,920 
Finished goods inventories, net of inventory reserves of $17,847, $19,268, and $18,057, respectively
681,573 744,573 858,258 
Prepaid expenses and other current assets(*)
56,616 33,812 68,245 
Total current assets1,045,371 1,188,720 1,341,762 
Property, plant, and equipment, net of accumulated depreciation of $592,310, $569,528, and $548,013, respectively
178,100 189,822 186,778 
Operating lease assets499,689 492,335 449,350 
Tradenames, net298,274 298,393 307,518 
Goodwill210,517 209,333 211,247 
Customer relationships, net28,995 30,564 32,248 
Other assets27,525 30,548 31,747 
Total assets$2,288,471 $2,439,715 $2,560,650 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$281,333 $264,078 $408,006 
Current operating lease liabilities(*)
137,473 142,432 129,744 
Other current liabilities98,730 122,439 96,102 
Total current liabilities517,536 528,949 633,852 
Long-term debt, net496,984 616,624 616,275 
Deferred income taxes45,436 41,235 45,730 
Long-term operating lease liabilities420,805 421,741 400,046 
Other long-term liabilities32,701 34,757 43,881 
Total liabilities$1,513,462 $1,643,306 $1,739,784 
Commitments and contingencies - Note 12
Stockholders’ equity:
Preferred stock; par value $0.01 per share; 100,000 shares authorized; none issued or outstanding
$ $ $ 
Common stock, voting; par value $0.01 per share; 150,000,000 shares authorized; 37,354,464, 37,692,132, and 39,315,094 shares issued and outstanding, respectively
374 377 393 
Additional paid-in capital   
Accumulated other comprehensive loss(24,963)(34,338)(32,203)
Retained earnings799,598 830,370 852,676 
Total stockholders’ equity775,009 796,409 820,866 
Total liabilities and stockholders’ equity$2,288,471 $2,439,715 $2,560,650 
(*)Prepaid expenses and other current assets and Current operating lease liabilities as of July 2, 2022 were revised to reflect the presentation for payments of rent before payment due date of $13.2 million.
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 endedTwo fiscal quarters ended
July 1, 2023July 2, 2022July 1, 2023July 2, 2022
Net sales$600,199 $700,695 $1,296,079 $1,481,980 
Cost of goods sold308,303 369,456 694,716 795,699 
Gross profit291,896 331,239 601,363 686,281 
Royalty income, net4,341 5,602 10,860 13,076 
Selling, general, and administrative expenses258,676 261,423 518,308 521,315 
Operating income 37,561 75,418 93,915 178,042 
Interest expense8,083 8,652 17,727 23,784 
Interest income(1,005)(272)(1,705)(610)
Other (income) expense, net(767)17 (1,025)(494)
Loss on extinguishment of debt 19,940  19,940 
Income before income taxes31,250 47,081 78,918 135,422 
Income tax provision 7,383 10,111 19,055 30,519 
Net income $23,867 $36,970 $59,863 $104,903 
Basic net income per common share$0.64 $0.93 $1.59 $2.60 
Diluted net income per common share$0.64 $0.93 $1.59 $2.59 
Dividend declared and paid per common share$0.75 $0.75 $1.50 $1.50 
See accompanying notes to the unaudited condensed consolidated financial statements.
2


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
Fiscal quarter endedTwo fiscal quarters ended
July 1, 2023July 2, 2022July 1, 2023July 2, 2022
Net income$23,867 $36,970 $59,863 $104,903 
Other comprehensive income (loss):
Foreign currency translation adjustments5,449 (6,088)9,375 (3,306)
Comprehensive income$29,316 $30,882 $69,238 $101,597 
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 January 1, 202241,148,870 $411 $ $(28,897)$978,672 $950,186 
Exercise of stock options5,100  222   222 
Withholdings from vesting
of restricted stock
(70,452) (6,623)  (6,623)
Restricted stock activity265,412 3 (3)   
Stock-based compensation expense—  5,859   5,859 
Repurchase of common stock(793,008)(8)545  (75,033)(74,496)
Cash dividends declared and paid of $0.75 per common share
—    (30,573)(30,573)
Comprehensive income—   2,782 67,933 70,715 
Balance at April 2, 202240,555,922 $406 $ $(26,115)$940,999 $915,290 
Exercise of stock options1,500  89   89 
Withholdings from vesting
of restricted stock
(705) (58)  (58)
Restricted stock activity30,731      
Stock-based compensation expense—  6,359   6,359 
Repurchase of common stock(1,272,354)(13)(6,390) (95,407)(101,810)
Cash dividends declared and paid of $0.75 per common share
—    (29,886)(29,886)
Comprehensive income—   (6,088)36,970 30,882 
Balance at July 2, 202239,315,094 $393 $ $(32,203)$852,676 $820,866 
Common stock - shares
Common
stock - $
Additional
paid-in
capital
Accumulated other comprehensive
loss
Retained
earnings
Total
stockholders’
equity
Balance at December 31, 202237,692,132 $377 $ $(34,338)$830,370 $796,409 
Exercise of stock options1,400  83   83 
Withholdings from vesting
of restricted stock
(61,423)(1)(4,404) (371)(4,776)
Restricted stock activity303,015 3 (3)   
Stock-based compensation expense—  4,343   4,343 
Repurchase of common stock(135,873)(1)  (9,585)(9,586)
Cash dividends declared and paid of $0.75 per common share
—    (28,483)(28,483)
Comprehensive income—   3,926 35,996 39,922 
Other—  (19)  (19)
Balance at April 1, 202337,799,251 $378 $ $(30,412)$827,927 $797,893 
Withholdings from vesting
of restricted stock
(932) (61)  (61)
Restricted stock activity5,626      
Stock-based compensation expense—  6,641   6,641 
Repurchase of common stock(449,481)(4)(6,294) (24,038)(30,336)
Cash dividends declared and paid of $0.75 per common share
—    (28,158)(28,158)
Comprehensive income—   5,449 23,867 29,316 
Other—  (286)  (286)
Balance at July 1, 202337,354,464 $374 $ $(24,963)$799,598 $775,009 
            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
July 1, 2023July 2, 2022
Cash flows from operating activities:
Net income $59,863 $104,903 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of property, plant, and equipment30,655 29,838 
Amortization of intangible assets1,877 1,865 
(Recoveries of) provisions for excess and obsolete inventory, net(1,581)3,709 
Gain on partial termination of corporate lease(4,366) 
Other asset impairments and loss on disposal of property, plant and equipment, net of recoveries2,751 246 
Amortization of debt issuance costs788 1,173 
Stock-based compensation expense10,984 12,218 
Unrealized foreign currency exchange gain, net(429)(32)
Recoveries of doubtful accounts receivable from customers(491)(1,520)
Unrealized (gain) loss on investments(633)1,867 
Loss on extinguishment of debt 19,940 
Deferred income taxes expense 4,274 4,762 
Other 1,019 
Effect of changes in operating assets and liabilities:
Accounts receivable67,425 48,973 
Finished goods inventories70,017 (215,519)
Prepaid expenses and other assets(1)(2)
(21,643)(19,071)
Accounts payable and other liabilities(1)(2)
(10,249)(87,966)
Net cash provided by (used in) operating activities$209,242 $(93,595)
Cash flows from investing activities:
Capital expenditures$(26,356)$(16,313)
Net cash used in investing activities$(26,356)$(16,313)
Cash flows from financing activities:
Payment of senior notes due 2025$ $(500,000)
Premiums paid to extinguish debt (15,678)
Payment of debt issuance costs (2,420)
Borrowings under secured revolving credit facility 120,000 
Payments on secured revolving credit facility(120,000) 
Repurchases of common stock(39,922)(176,306)
Dividends paid(56,641)(60,460)
Withholdings from vesting of restricted stock(4,837)(6,681)
Proceeds from exercises of stock options83 311 
Other (321)
Net cash used in financing activities$(221,317)$(641,555)
Net effect of exchange rate changes on cash and cash equivalents1,186 (1,492)
Net decrease in cash and cash equivalents$(37,245)$(752,955)
Cash and cash equivalents, beginning of period211,748 984,294 
Cash and cash equivalents, end of period$174,503 $231,339 
(1)Cash flows for the two fiscal quarters ended July 2, 2022 were revised to reflect the presentation for payments of rent before payment due date of $13.2 million.
(2)Operating lease assets obtained in exchange for operating lease liabilities were $80.0 million and $30.8 million for the two fiscal quarters ended July 1, 2023 and two fiscal quarters ended July 2, 2022, respectively.
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”) design, source, and market branded childrenswear under the Carter’s, OshKosh B’gosh (or “OshKosh”), Skip Hop, Child of Mine, Just One You, Simple Joys, Little Planet, and other brands. The Company’s products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to leading department stores, national chains, and specialty retailers domestically and internationally and for sale in the Company’s retail stores and on its eCommerce sites that market its brand name merchandise and other licensed products manufactured by other companies.
Our trademarks that are referred to in this Quarterly Report on Form 10-Q, including Carter’sOshKosh B’gosh, OshKosh, Child of Mine, Just One You, Simple Joys, Little Planet, and other brands, many of which are registered in the United States and in over 100 other countries and territories, are each the property of one or more subsidiaries of Carter’s, Inc.
NOTE 2 – BASIS 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 U.S. 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, statement of shareholders’ 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 July 1, 2023 are not necessarily indicative of the results that may be expected for the current fiscal year ending December 30, 2023.
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 and disclosures of contingent 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 from those estimates.
The accompanying condensed consolidated balance sheet as of December 31, 2022 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.
We have recast the consolidated statement of operations for the fiscal quarter and two fiscal quarters ended July 2, 2022 to conform to our current presentation of combining Adverse purchase commitments within Cost of goods sold.
Inventories
Our inventories, which consist primarily of finished goods, are stated at the lower of cost (first-in, first-out basis for wholesale inventory and average cost for retail inventories) or net realizable value. Inventories at July 1, 2023 were $681.6 million compared to $858.3 million at July 2, 2022 and $744.6 million at December 31, 2022. The decrease of $176.7 million, or 20.6%, at July 1, 2023 compared to July 2, 2022 is primarily due to decreased in-transit inventory and lower forecasted net sales for fiscal 2023, partially offset by increased product costs. Due to the seasonal nature of our operations, the inventories balance at July 1, 2023 is not comparable to the inventories balance at December 31, 2022.
Adjustments to bring inventory to net realizable value as a result of obsolete, damaged, and excess inventory at July 1, 2023 were consistent to those at July 2, 2022. These adjustments as a percentage of gross inventory have remained relatively stable due to the overall quality and planned use of the inventory. The liability for adverse inventory and fabric purchase commitments decreased from $5.2 million as of July 2, 2022 to $2.9 million as of July 1, 2023, primarily due to the consumption of previously reserved fabric.
6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Supply Chain Financing Program
We facilitate a voluntary supply chain finance (“SCF”) program through participating financial institutions. This SCF program enables our suppliers to sell their receivables due from the Company to participating financial institutions at their discretion. As of July 1, 2023, the SCF program has a $70.0 million revolving capacity. We are not a party to the agreements between the participating financial institutions and the suppliers in connection with the SCF program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the SCF program. No guarantees are provided by the Company or any of our subsidiaries under the SCF program.
The amounts payable to the participating financial institution for suppliers who voluntarily participate in the SCF program are included in Accounts payable on our condensed consolidated statement balance sheets. Amounts under the SCF program included in Account payable were $23.0 million, $16.5 million, and $23.5 million as of July 1, 2023, December 31, 2022, and July 2, 2022, respectively. Payments made under the SCF program, like payments of other accounts payable, are a reduction to our operating cash flow.
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 2023 are noted below.
Recent Accounting Pronouncements
Supplier Finance Programs (ASU 2022-04)
In September 2022, the FASB issued Accounting Standards Update No. 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”). This new guidance is designed to enhance transparency around supplier finance programs by requiring new disclosures that would allow a user of the financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the disclosure of the rollforward of annual activity, which is effective for fiscal years beginning after December 15, 2023. The effect of the adoption of ASU 2022-04 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 (“wholesale channel”). The Company also earns royalties from certain of its licensees. Disaggregated revenues from these sources for the fiscal periods indicated were as follows:
Fiscal quarter ended July 1, 2023
(dollars in thousands)U.S. RetailU.S. WholesaleInternationalTotal
Wholesale channel$ $186,867 $33,209 $220,076 
Direct-to-consumer323,466  56,657 380,123 
$323,466 $186,867 $89,866 $600,199 
Royalty income, net$1,432 $1,988 $921 $4,341 
7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Two fiscal quarters ended July 1, 2023
(dollars in thousands)U.S. RetailU.S. WholesaleInternationalTotal
Wholesale channel$ $466,856 $71,705 $538,561 
Direct-to-consumer647,187  110,331 757,518 
$647,187 $466,856 $182,036 $1,296,079 
Royalty income, net$3,510 $5,546 $1,804 $10,860 
Fiscal quarter ended July 2, 2022
(dollars in thousands)U.S. RetailU.S. WholesaleInternationalTotal
Wholesale channel$ $224,016 $37,019 $261,035 
Direct-to-consumer379,097  60,563 439,660 
$379,097 $224,016 $97,582 $700,695 
Royalty income, net$1,317 $2,885 $1,400 $5,602 
Two fiscal quarters ended July 2, 2022
(dollars in thousands)U.S. RetailU.S. WholesaleInternationalTotal
Wholesale channel$ $531,317 $87,452 $618,769 
Direct-to-consumer745,455  117,756 863,211 
$745,455 $531,317 $205,208 $1,481,980 
Royalty income, net$4,558 $6,315 $2,203 $13,076 
Accounts Receivable from Customers and Licensees
The components of Accounts receivable, net, were as follows:
(dollars in thousands)July 1, 2023December 31, 2022July 2, 2022
Trade receivables from wholesale customers, net$128,421 $195,078 $182,253 
Royalties receivable4,369 5,386 5,203 
Other receivables(1)
11,965 14,571 10,671 
Total gross receivables$144,755 $215,035 $198,127 
Less: Wholesale accounts receivable reserves(2)(3)
(12,076)(16,448)(14,207)
Accounts receivable, net$132,679 $198,587 $183,920 
(1)Includes tax, payroll, gift card and other receivables.
(2)Includes allowance for chargebacks of $8.2 million,$9.3 million, and $8.4 million for the periods ended July 1, 2023, December 31, 2022, and July 2, 2022, respectively.
(3)Includes allowance for credit losses of $3.8 million, $7.2 million, and $5.8 million for the periods ended July 1, 2023, December 31, 2022, and July 2, 2022, respectively.
Contract Assets and Liabilities
The Company’s contract assets are not material.
8


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)July 1, 2023December 31, 2022July 2, 2022
Contract liabilities - current:
Unredeemed gift cards$23,987 $23,303 $21,251 
Unredeemed customer loyalty rewards3,575 5,276 4,456 
Carter’s credit card - upfront bonus(1)
714 714 714 
Total contract liabilities - current(2)
$28,276 $29,293 $26,421 
Contract liabilities - non-current(3)
$1,071 $1,429 $1,786 
Total contract liabilities$29,347 $30,722 $28,207 
(1)The Company received an upfront signing bonus from a third-party financial institution, which will be recognized as revenue on a straight-line basis over the term of the agreement. This amount reflects the current portion of this bonus to be recognized as revenue over the next twelve months.
(2)Included with Other current liabilities on the Company’s condensed consolidated balance sheets.
(3)This amount reflects the non-current portion of the Carter’s credit card upfront bonus and is included within Other long-term liabilities on the Company’s condensed consolidated balance sheets.
NOTE 4 – ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of Accumulated other comprehensive loss consisted of the following:
(dollars in thousands)July 1, 2023December 31, 2022July 2, 2022
Cumulative foreign currency translation adjustments$(19,451)$(28,826)$(24,608)
Pension and post-retirement obligations(*)
(5,512)(5,512)(7,595)
Total accumulated other comprehensive loss$(24,963)$(34,338)$(32,203)
(*)Net of income taxes of $1.7 million, $1.7 million, and $2.4 million for the period ended July 1, 2023, December 31, 2022, and July 2, 2022, respectively.
During the first two quarters of both fiscal 2023 and fiscal 2022, no amounts were reclassified from Accumulated other comprehensive loss to the consolidated statement of operations.
NOTE 5 – COMMON STOCK
Open Market Share Repurchases
The Company repurchased and retired shares in open market transactions in the following amounts for the fiscal periods indicated:
Fiscal quarter endedTwo fiscal quarters ended
July 1, 2023July 2, 2022July 1, 2023July 2, 2022
Number of shares repurchased449,481 1,272,354 585,354 2,065,362 
Aggregate cost of shares repurchased (dollars in thousands)(*)
$30,336 $101,810 $39,922 $176,306 
Average price per share(*)
$67.49 $80.02 $68.20 $85.36 
(*)The aggregate cost of share repurchases and average price paid per share excludes excise tax on share repurchases imposed as part of the Inflation Reduction Act of 2022.
The total aggregate remaining capacity under outstanding repurchase authorizations as of July 1, 2023 was approximately $709.6 million, based on settled repurchase transactions. The share repurchase authorizations have no expiration date.
The Inflation Reduction Act of 2022 imposed a nondeductible 1% excise tax on the net value of certain share repurchases made after December 31, 2022. Beginning in fiscal year 2023, we reflected the applicable excise tax to Additional paid-in capital on our condensed consolidated balance sheets as part of the cost basis of the shares repurchased. The corresponding liability for the excise tax payable is recorded in Other current liabilities on our condensed consolidated balance sheets.

9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Future repurchases may occur from time to time in the open market, in privately negotiated transactions, or otherwise. The timing and amount of any repurchases will be at the discretion of the Company subject to restrictions under the Company’s secured revolving credit facility, market conditions, stock price, other investment priorities, and other factors.
Dividends
In each of the first two quarters of fiscal 2023, the Board of Directors declared, and the Company paid, a cash dividend per common share of $0.75 (for an aggregate cash dividend per common share of $1.50 for the first two quarters of fiscal 2023). Additionally, in each of the first two quarters of fiscal 2022, the Board of Directors declared, and the Company paid, a cash dividend per common share of $0.75 (for an aggregate cash dividend per common share of $1.50 for the first two quarters of fiscal 2022). The Board of Directors will evaluate future dividend declarations based on a number of factors, including restrictions under the Company’s secured revolving credit facility, business conditions, the Company’s financial performance, and other considerations.
Provisions in the Company’s secured revolving credit facility could have the effect of restricting the Company’s ability to pay cash dividends on, or make future repurchases of, its common stock, as further described in Note 6, Long-term Debt, to the consolidated financial statements.
NOTE 6 – LONG-TERM DEBT
Long-term debt consisted of the following:
(dollars in thousands)July 1, 2023December 31, 2022July 2, 2022
$500 million 5.625% senior notes due March 15, 2027
$500,000 $500,000 $500,000 
Less unamortized issuance-related costs for senior notes(3,016)(3,376)(3,725)
Senior notes, net$496,984 $496,624 $496,275 
Secured revolving credit facility 120,000 120,000 
Total long-term debt, net
$496,984 $616,624 $616,275 
Secured Revolving Credit Facility
As of July 1, 2023, the Company had no outstanding borrowings under its secured revolving credit facility, exclusive of $4.4 million of outstanding letters of credit. As of July 1, 2023, there was approximately $845.6 million available for future borrowing. All outstanding borrowings under the Company’s secured revolving credit facility are classified as non-current liabilities on the Company’s condensed consolidated balance sheets because of the contractual repayment terms under the credit facility.
The Company’s secured revolving credit facility provides for an aggregate credit line of $850 million which includes a $750 million U.S. dollar facility and a $100 million multicurrency facility. The credit facility matures in April 2027. The facility contains covenants that restrict the Company’s ability to, among other things: (i) create or incur liens, debt, guarantees or other investments, (ii) engage in mergers and consolidations, (iii) pay dividends or other distributions to, and redemptions and repurchases from, equity holders, (iv) prepay, redeem or repurchase subordinated or junior debt, (v) amend organizational documents, and (vi) engage in certain transactions with affiliates.
As of July 1, 2023, the interest rate margins applicable to the secured revolving credit facility were 1.125% for adjusted term Secured Overnight Financing Rate (“SOFR”) loans and 0.125% for base rate loans. As of July 1, 2023, the applicable borrowing rate for the secured revolving credit facility was approximately 6.37%, consisting of an adjusted term SOFR rate plus the applicable margin. As of July 1, 2023, the Company was in compliance with its financial and other covenants under the secured revolving credit facility.
10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 – STOCK-BASED COMPENSATION
The Company recorded stock-based compensation expense as follows:
Fiscal quarter endedTwo fiscal quarters ended
(dollars in thousands)July 1, 2023July 2, 2022July 1, 2023July 2, 2022
Stock options$ $12 $ $178 
Restricted stock:
   Time-based awards4,183 4,296 8,545 9,455 
   Performance-based awards908 345 889 879 
   Stock awards1,550 1,706 1,550 1,706 
Total$6,641 $6,359 $10,984 $12,218 
The Company recognizes compensation cost ratably over the applicable performance periods based on the estimated probability of achievement of its performance targets at the end of each period. During the first quarter of fiscal 2023, the achievement of performance target estimates related to certain performance-based grants were revised resulting in a reversal of $0.4 million of previously recognized stock compensation expense.
NOTE 8 – INCOME TAXES
As of July 1, 2023, the Company had gross unrecognized income tax benefits of approximately $8.9 million, of which $6.3 million, if ultimately recognized, may affect the Company’s effective income tax rate in the periods settled. The Company has recorded tax positions for which the ultimate deductibility is more likely than not, but for which there is uncertainty about the timing of such deductions.
Included in the reserves for unrecognized tax benefits at July 1, 2023 is approximately $2.4 million of reserves for which the statute of limitations is expected to expire within the next 12 months. If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective income tax rate for fiscal 2023 along with the effective income tax rate in the quarter in which the benefits are recognized.
The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and recognizes penalties related to unrecognized income tax benefits as a component of income tax expense. Interest expense recorded on uncertain tax positions was not material for the second quarter and first two quarters of fiscal 2023 and fiscal 2022. The Company had approximately $1.6 million, $1.5 million, and $2.1 million of interest accrued on uncertain tax positions as of July 1, 2023, December 31, 2022, and July 2, 2022, respectively.
NOTE 9 – FAIR VALUE MEASUREMENTS
Investments
The Company invests in marketable securities, principally equity-based mutual funds, to mitigate the risk associated with the investment return on employee deferrals of compensation. All of the marketable securities are included in Other assets on the accompanying condensed consolidated balance sheets, and their aggregate fair values were approximately $15.7 million, $15.1 million, and $15.7 million at July 1, 2023, December 31, 2022, and July 2, 2022, respectively. These investments are classified as Level 1 within the fair value hierarchy. The change in the aggregate fair values of marketable securities is due to the net activity of gains and losses and any contributions and distributions during the period. Gains on the investments in marketable securities were $0.2 million and $0.6 million for the second quarter and the first two quarters of fiscal 2023, respectively. Losses on the investments in marketable securities were $0.9 million and $1.9 million for the second quarter and the first two quarters of fiscal 2022, respectively. These amounts are included in Other (income) expense, net on the Company’s condensed consolidated statement of operations.
Borrowings
As of July 1, 2023, the Company had no outstanding borrowings under its secured revolving credit facility.
The fair value of the Company’s senior notes at July 1, 2023 was approximately $489.8 million. The fair value of these senior notes with a notional value and carrying value (gross of debt issuance costs) of $500.0 million was estimated using a quoted price as provided in the secondary market, which considers the Company’s credit risk and market related conditions, and is therefore within Level 2 of the fair value hierarchy.
11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill, Intangible, and Long-Lived Tangible Assets
Some assets are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances. These assets can include goodwill, indefinite-lived intangible assets, and long-lived tangible assets that have been reduced to fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
In the fourth quarter of fiscal 2022, impairment charges of $5.6 million, $3.0 million, and $0.4 million were recorded on our indefinite-lived Skip Hop tradename asset in the U.S. Wholesale, International, and U.S. Retail segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived Skip Hop tradename asset. The carrying value of the indefinite-lived Skip Hop tradename asset as of July 1, 2023 was $6.0 million.
NOTE 10 – EARNINGS PER SHARE
The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:
Fiscal quarter endedTwo fiscal quarters ended
July 1, 2023July 2, 2022July 1, 2023July 2, 2022
Weighted-average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding
36,824,490 39,344,834 36,964,509 39,807,354 
Dilutive effect of equity awards127 29,153 3,850 48,274 
Diluted number of common and common equivalent shares outstanding36,824,617 39,373,987 36,968,359 39,855,628 
Earnings per share:
(dollars in thousands, except per share data)
Basic net income per common share:
Net income $23,867 $36,970 $59,863 $104,903 
Income allocated to participating securities
(426)(536)(1,018)(1,480)
Net income available to common shareholders$23,441 $36,434 $58,845 $103,423 
Basic net income per common share$0.64 $0.93 $1.59 $2.60 
Diluted net income per common share:
Net income $23,867 $36,970 $59,863 $104,903 
Income allocated to participating securities
(426)(536)(1,018)(1,479)
Net income available to common shareholders$23,441 $36,434 $58,845 $103,424 
Diluted net income per common share$0.64 $0.93 $1.59 $2.59 
Anti-dilutive awards excluded from diluted earnings per share computation(*)
565,956 532,432 497,076 288,800
(*)The volume of anti-dilutive awards is, in part, due to the related unamortized compensation costs.
12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 – OTHER CURRENT LIABILITIES
Other current liabilities at the end of any comparable period, were as follows:
(dollars in thousands)July 1, 2023December 31, 2022July 2, 2022
Unredeemed gift cards$23,987 $23,303 $21,251 
Accrued employee benefits12,900 16,356 12,208 
Accrued salaries and wages11,551 11,519 11,644 
Accrued taxes11,467 10,445 8,782 
Income taxes payable973 17,484 5,904 
Accrued other37,852 43,332 36,313 
Other current liabilities$98,730 $122,439 $96,102 
NOTE 12 – COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and pending or threatened lawsuits in the normal course of business. The Company is not currently a party to any legal proceedings that it believes would have a material adverse impact on its financial position, results of operations, or cash flows.
The Company’s contractual obligations and commitments include obligations associated with leases, the secured revolving credit agreement, senior notes, and employee benefit plans.
NOTE 13 – SEGMENT INFORMATION
The table below presents certain information for the Company’s reportable segments and unallocated corporate expenses for the periods indicated:
Fiscal quarter endedTwo fiscal quarters ended
(dollars in thousands)July 1, 2023% of
consolidated
net sales
July 2, 2022% of
consolidated
net sales
July 1,
2023
% of
consolidated
net sales
July 2,
2022
% of
consolidated
net sales
Net sales:
U.S. Retail$323,466 53.9 %$379,097 54.1 %$647,187 49.9 %$745,455 50.3 %
U.S. Wholesale186,867 31.1 %224,016 32.0 %466,856 36.0 %531,317 35.9 %
International    89,866 15.0 %97,582 13.9 %182,036 14.1 %205,208 13.8 %
Consolidated net sales$600,199 100.0 %$700,695 100.0 %$1,296,079 100.0 %$1,481,980 100.0 %
Operating income:
% of
segment
net sales
% of
segment
net sales
% of
segment
net sales
% of
segment
net sales
U.S. Retail$28,211 8.7 %$55,540 14.7 %$55,150 8.5 %$105,534 14.2 %
U.S. Wholesale29,209 15.6 %33,593 15.0 %81,301 17.4 %94,099 17.7 %
International6,690 7.4 %12,163 12.5 %9,814 5.4 %22,551 11.0 %
Corporate expenses(*)
(26,549)n/a(25,878)n/a(52,350)n/a(44,142)n/a
Consolidated operating income$37,561 6.3 %$75,418 10.8 %$93,915 7.2 %$178,042 12.0 %
(*)Corporate expenses include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, office occupancy, information technology, certain legal fees, consulting fees, and audit fees.
(dollars in millions)Fiscal quarter ended July 1, 2023Two fiscal quarters ended July 1, 2023
Charges:U.S. RetailU.S. WholesaleInternationalU.S. RetailU.S. WholesaleInternational
Organizational restructuring(*)
$0.2 $0.1 $ $(0.6)$(0.4)$ 
(*)Relates to charges (gains) for organizational restructuring and related corporate office lease amendment actions. Additionally, the second fiscal quarter and first two fiscal quarters ended July1, 2023 includes a corporate charge of $0.1 million and $2.5 million, respectively, related to organizational restructuring and related corporate office lease amendment actions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that are not historical fact and use predictive words such as “estimates”, “outlook”, “guidance”, “expect”, “believe”, “intend”, “designed”, “target”, “plans”, “may”, “will”, “are confident” and similar words are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements and related assumptions involve risks and uncertainties that could cause actual results and outcomes to differ materially from any forward-looking statements or views expressed in this Form 10-Q. These risks and uncertainties include, but are not limited to, the factors disclosed in Part I, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and otherwise in our reports and filings with the Securities and Exchange Commission, as well as the following factors: the continuing effects of the novel coronavirus (COVID-19) pandemic; macroeconomic factors, including inflationary pressures; the impact of supply chain delays; financial difficulties for one or more of our major customers; an overall decrease in consumer spending, including, but not limited to, decreases in consumer spending caused by declining birth rates; our products not being accepted in the marketplace; increased competition in the market place; diminished value of our brands; the failure to protect our intellectual property; the failure to comply with applicable quality standards or regulations; unseasonable or extreme weather conditions; pending and threatened lawsuits; a breach of our information technology systems and the loss of personal data; increased margin pressures, including increased cost of materials and labor; and our inability to successfully increase prices to offset those increased costs; our foreign sourcing arrangements; disruptions in our supply chain, including increased transportation and freight costs; the management and expansion of our business domestically and internationally; the acquisition and integration of other brands and businesses; changes in our tax obligations, including additional customs, duties or tariffs; our ability to achieve our forecasted financial results for the fiscal year; our continued ability to declare and pay a dividend and conduct share repurchases in future periods; our planned opening and closing of stores during the fiscal year; and other risks detailed in the Company’s periodic reports as filed in accordance with the Securities Exchange Act of 1934, as amended. The Company does not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.
OVERVIEW
We are the largest branded marketer of young children’s apparel in North America. We own two of the most highly recognized and trusted brand names in the children’s apparel market, Carter’s and OshKosh B’gosh (or “OshKosh”). We also own Skip Hop, a leading young children’s lifestyle brand, exclusive Carter’s brands developed for specific wholesale customers, and Little Planet, a brand focused on organic fabrics and sustainable materials.
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. We acquired OshKosh in 2005.
Established in 2003, the Skip Hop brand rethinks, reenergizes, and reimagines durable necessities to create higher value, superior quality, and top-performing products for parents, babies, and toddlers. We acquired Skip Hop in 2017.
Additionally, Child of Mine, an exclusive Carter’s brand, is sold at Walmart; Just One You, an exclusive Carter’s brand, is sold at Target, and Simple Joys, an exclusive Carter’s brand, is available on Amazon.
Launched in 2021, the Little Planet brand focuses on sustainable clothing through the sourcing of mostly organic cotton as certified under GOTS, a global textile processing standard for organic fibers. This brand includes a wide assortment of baby and toddler apparel, accessories, and sleepwear.
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 related products. We believe our brands are complementary to one another in product offering and aesthetic. Each brand is uniquely positioned in the marketplace and offers great value to families with young children. Our multi-channel, global business model, which includes retail stores, eCommerce, and wholesale distribution capabilities, as well as omni-channel capabilities in the United States and Canada, enables us to reach a broad range of consumers around the world. As of July 1, 2023, our channels included approximately 1,000 company-owned retail stores, approximately 19,350 wholesale locations, and eCommerce sites in North America, as well as our international wholesale accounts and licensees which operate in over 90 countries.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 2022 fiscal year ended December 31, 2022.
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. 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.
Gross Profit and Gross Margin
Gross profit is calculated as consolidated net sales less cost of goods sold. Gross margin is calculated as gross profit divided by consolidated net sales. Cost of goods sold includes 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 Selling, general, and administrative (“SG&A”) expenses. 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. Our gross profit and gross margin may not be comparable to other entities that define their metrics differently.
Recent Developments
Macroeconomic Factors, Consumer Demand, and Inventories
Macroeconomic factors, including inflationary pressures, increased interest rates, the lapping of government stimulus, increased credit card debt, decreased savings rates, and increased risks of a recession continued to create a complex and challenging environment for our business in the second quarter of fiscal 2023. We believe these macroeconomic factors have resulted in lower consumer sentiment and negatively impacted demand for our products and will likely continue to negatively impact demand in the remainder of fiscal 2023.
Compared to the end of the second quarter of fiscal 2022, our inventories decreased $176.7 million, or 20.6%, to $681.6 million, primarily due to decreased in-transit inventory and lower forecasted net sales for fiscal 2023, partially offset by increased product costs. Inventory held to be sold in future periods, or “pack and hold” inventory, decreased during the second quarter of fiscal 2023 but remained relatively consistent to the levels at the end of the second quarter of fiscal 2022. Inventory levels are elevated throughout much of the retail industry, resulting in an increase in promotional activity as companies sell off their excess inventories. We have taken action to align inventory with planned demand, including selectively utilizing a pack and hold strategy to sell through inventory profitably in later periods, and selling through excess inventory in our own retail channels and in off-price channels. As a result, inventory levels during fiscal 2023 are expected to be lower than those in fiscal 2022.
Inflationary Pressures
In fiscal 2022, the cost of transportation, particularly ocean freight rates, raw materials, packaging materials, labor, energy, fuel, and other inputs necessary for the production and distribution of our products rapidly increased. We continued to experience inflationary pressures on input costs through the end of the second quarter of fiscal 2023, and we may continue to experience these pressures for the remainder of fiscal 2023. We have offset some of these cost pressures through increases in the selling prices of some of our products, product cost optimization, increasing and diversifying our portfolio of suppliers, leveraging a mix of longer-term shipping container contracts and spot market purchases, and reductions in discretionary spending. However, our pricing actions could have an adverse impact on demand and may not be sufficient to cover all increased costs that we may experience.
Organizational Restructuring and Corporate Office Lease Amendment
During the first quarter of fiscal 2023, we initiated several organizational restructuring initiatives which included a reorganization of staffing models across multiple functions to drive labor savings and increase efficiencies. In conjunction with these plans, we incurred approximately $0.4 million and $3.3 million in costs in the second quarter and the first two quarters of
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
fiscal 2023, respectively. These costs primarily related to severance and other termination benefits expected to be paid out by the end of the year and are included in Other current liabilities in the accompanying unaudited condensed consolidated balance sheet.
Additionally, we executed an amendment to the lease of our corporate headquarters in Atlanta, Georgia which resulted in returning three floors to the landlord and extending the lease to 2035. As a result of the reduction in leased office space, we recorded a net gain of $1.8 million related to the partial termination of the lease in the first quarter of fiscal 2023.
Second Fiscal Quarter 2023 Financial Highlights
Our sales and gross profit in the second quarter of fiscal 2023 declined compared to the second quarter of fiscal 2022. We believe this reflects the significant ongoing and negative impact of high inflation on consumer demand for our products and reduced spending more broadly around the retail industry. Demand from our wholesale customers was lower in the second quarter of fiscal 2023 reflecting the same pressure on consumer demand in their own businesses and a more cautious approach regarding inventory commitments.
High inflation also continued to negatively weigh on aspects of our cost structure in the second quarter of fiscal 2023. Despite these challenges, we were able to increase our average selling prices per unit low-single digits, manage our variable expenses, increase our store count, reduce debt, and return capital to our shareholders.
Unless otherwise stated, comparisons are to the second quarter of fiscal 2022:
Consolidated net sales decreased $100.5 million, or 14.3%, to $600.2 million, primarily due to macroeconomic factors, including inflationary pressures, increased interest rates, and risk of recession, driving lower consumer demand.
Despite increased pressure on pricing from our competitors and increased product costs, gross margin increased 130 basis points (“bps”) to 48.6% due to decreased fabric purchase commitment charges and inventory provisions, decreased ocean freight rates, and improved price realization.
We believe that our growth in years ahead will be driven by our exclusive Carter’s brands and by new store openings. Given our progress with improved price realization, more attractive store opening opportunities in the United States continue to be available to us. During the second quarter of fiscal 2023, we opened 10 stores and closed 7 stores in the United States. We are projecting approximately 36 store openings and 1 store closure in the remainder of fiscal 2023.
As a result of our strong financial position and available liquidity, we repaid the outstanding balance on our secured revolving credit facility in the second quarter of fiscal 2023. Additionally, in the second quarter of fiscal 2023, we returned $58.5 million to our shareholders, comprised of $30.3 million in share repurchases and $28.2 million in cash dividends.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
SECOND FISCAL QUARTER ENDED JULY 1, 2023 COMPARED TO SECOND FISCAL QUARTER ENDED JULY 2, 2022
The following table summarizes our results of operations. All percentages shown in the below table and the discussion that follows have been calculated using unrounded numbers.
Fiscal quarter ended
(dollars in thousands, except per share data)July 1, 2023July 2, 2022$ Change% / bps Change
Net sales$600,199 $700,695 $(100,496)(14.3)%
Cost of goods sold308,303 369,456 (61,153)(16.6)%
Gross profit291,896 331,239 (39,343)(11.9)%
Gross profit as % of net sales48.6 %47.3 %130 bps
Royalty income, net4,341 5,602 (1,261)(22.5)%
Royalty income as % of net sales0.7 %0.8 %(10) bps
Selling, general, and administrative expenses258,676 261,423 (2,747)(1.1)%
SG&A expenses as % of net sales43.1 %37.3 %580 bps
Operating income37,561 75,418 (37,857)(50.2)%
Operating income as % of net sales6.3 %10.8 %(450) bps
Interest expense8,083 8,652 (569)(6.6)%
Interest income(1,005)(272)(733)>100%
Other income, net(767)17 (784)nm
Loss on extinguishment of debt— 19,940 (19,940)nm
Income before income taxes31,250 47,081 (15,831)(33.6)%
Income tax provision7,383 10,111 (2,728)(27.0)%
Effective tax rate(*)
23.6 %21.5 %210 bps
Net income$23,867 $36,970 $(13,103)(35.4)%
Basic net income per common share$0.64 $0.93 $(0.29)(31.2)%
Diluted net income per common share$0.64 $0.93 $(0.29)(31.2)%
Dividend declared and paid per common share$0.75 $0.75 $— — %
(*)Effective tax rate is calculated by dividing the provision for income taxes by income before income taxes.
Note: Results may not be additive due to rounding. Percentage changes that are not considered meaningful are denoted with “nm”.
Net Sales
Consolidated net sales decreased $100.5 million, or 14.3%, to $600.2 million. This decrease in net sales was primarily driven by macroeconomic factors, including inflationary pressures, increased interest rates, and risk of recession, driving lower consumer demand. These decreases were partially offset by increased average selling prices per unit due to improved price realization. Average selling prices per unit increased low-single digits and units sold decreased in the high-teens. Changes in foreign currency exchange rates used for translation had an unfavorable effect on our consolidated net sales of approximately $1.2 million.
Gross Profit and Gross Margin
Our consolidated gross profit decreased $39.3 million, or 11.9%, to $291.9 million and consolidated gross margin increased 130 bps to 48.6%. The decrease in consolidated gross profit was primarily driven by decreased net sales. The increase in gross margin was primarily driven by decreased fabric purchases commitment charges and inventory provisions and increased average selling prices per unit mentioned above. These factors were partially offset by increased average cost per unit sold and changes in customer and channel mix. Average cost per unit sold increased mid-single digits, reflecting increases to product input costs partially offset by decreased ocean freight rates. We expect inbound transportation rates, including ocean freight rates, to decrease in the second half of fiscal 2023 and into fiscal 2024.
Royalty Income
Consolidated royalty income decreased $1.3 million, or 22.5%, to $4.3 million, primarily driven by decreased wholesale customer demand.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, General, and Administrative Expenses
Consolidated SG&A expenses decreased $2.7 million, or 1.1%, to $258.7 million and increased as a percentage of consolidated net sales by approximately 580 bps to 43.1%. This increase in SG&A rate was primarily driven by fixed cost deleverage on decreased sales, increased consulting and professional fees, and increased performance-based compensation expense.
Operating Income
Consolidated operating income decreased $37.9 million, or 50.2%, to $37.6 million and decreased as a percentage of net sales by approximately 450 bps to 6.3%, primarily due to the factors discussed above.
Interest Expense
Consolidated interest expense decreased $0.6 million, or 6.6%, to $8.1 million. Weighted-average borrowings for the second quarter of fiscal 2023 were $521.5 million at an effective interest rate of 6.20%, compared to weighted-average borrowings for the second quarter of fiscal 2022 of $567.3 million at an effective interest rate of 5.99%.
The decrease in weighted-average borrowings was attributable to decreased borrowings under our secured revolving credit facility for the period. The increase in the effective interest rate was primarily due to increased interest rates on our secured revolving credit facility, reflecting the broader rise in market interest rates.
Loss on Extinguishment of Debt
During the second quarter of fiscal 2022, loss on extinguishment of debt was $19.9 million due to the early extinguishment of our $500 million in aggregate principal amount of 5.500% senior notes due May 2025.
Income Taxes
Our consolidated income tax provision decreased $2.7 million, or 27.0%, to $7.4 million and the effective tax rate increased 210 bps to 23.6%. The increased effective tax rate primarily relates to a higher proportion of income generated in the United States, which is a higher tax jurisdiction relative to our international operations.
Net Income
Our consolidated net income decreased $13.1 million, or 35.4%, to $23.9 million, primarily due to the factors previously discussed.
Results by Segment - Second Quarter of Fiscal 2023 compared to Second Quarter of Fiscal 2022
The following table summarizes net sales and operating income, by segment, for the second quarter of fiscal 2023 and the second quarter of fiscal 2022:
Fiscal quarter ended
(dollars in thousands)July 1, 2023% of consolidated net salesJuly 2, 2022% of consolidated net sales$ Change% Change
Net sales:
U.S. Retail$323,466 53.9 %$379,097 54.1 %$(55,631)(14.7)%
U.S. Wholesale186,867 31.1 %224,016 32.0 %(37,149)(16.6)%
International89,866 15.0 %97,582 13.9 %(7,716)(7.9)%
Consolidated net sales$600,199 100.0 %$700,695 100.0 %$(100,496)(14.3)%
Operating income:% of segment net sales% of segment net sales
U.S. Retail$28,211 8.7 %$55,540 14.7 %$(27,329)(49.2)%
U.S. Wholesale29,209 15.6 %33,593 15.0 %(4,384)(13.1)%
International6,690 7.4 %12,163 12.5 %(5,473)(45.0)%
Unallocated corporate expenses(26,549)n/a(25,878)n/a(671)2.6 %
Consolidated operating income$37,561 6.3 %$75,418 10.8 %$(37,857)(50.2)%
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Comparable Sales Metrics
We present comparable sales metrics because we consider them an important supplemental measure of our U.S. Retail and International performance, and the Company uses such information to assess the performance of the U.S. Retail and International segments. Additionally, we believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of our business.
Our comparable sales metrics include sales for all stores and eCommerce sites that were open and operated by us during the comparable fiscal period, including stand-alone format stores that converted to multi-branded format stores and certain remodeled or relocated stores. A store or site becomes comparable following 13 consecutive full fiscal months of operations. If a store relocates within the same center with no business interruption or material change in square footage, the sales of such store will continue to be included in the comparable store metrics. If a store relocates to another center more than five miles away, or there is a material change in square footage, such store is treated as a new store. Stores that are closed during the relevant fiscal period are included in the comparable store sales metrics up to the last full fiscal month of operations.
The method of calculating sales metrics varies across the retail industry. As a result, our comparable sales metrics may not be comparable to those of other retailers.
U.S. Retail
U.S. Retail segment net sales decreased $55.6 million, or 14.7%, to $323.5 million. The decrease in net sales was primarily driven by macroeconomic factors, including inflationary pressures, increased interest rates, and risk of recession, driving lower consumer demand. This decreased demand resulted in lower traffic and decreased units per transaction in our eCommerce channels and in our retail stores. Units sold decreased approximately 20%, while average selling prices per unit increased mid-single digits due to improved price realization, partially offset by an increased mix of clearance sales.
Comparable net sales, including retail store and eCommerce, decreased 15.9% primarily driven by the factors mentioned above. As of July 1, 2023, we operated 763 retail stores in the U.S. compared to 757 as of December 31, 2022, and 738 as of July 2, 2022.
U.S. Retail segment operating income decreased $27.3 million, or 49.2%, to $28.2 million, primarily due to a decrease in gross profit of $31.4 million, partially offset by a decrease in SG&A expenses of $4.0 million. Operating margin decreased 600 bps to 8.7%. The primary drivers of the decrease in operating margin were a 670 bps increase in SG&A rate, partially offset by a 70 bps increase in gross margin. The increase in gross margin was primarily due to increased average selling prices per unit mentioned above and decreased fabric purchase commitment charges, partially offset by increased product costs and an increased mix of clearance sales. Average cost per unit sold increased high-single digits, reflecting increases to product input costs partially offset by decreased ocean freight rates. The increase in SG&A rate was primarily driven by fixed cost deleverage on decreased net sales and increased performance-based compensation expense, partially offset by decreased marketing expense.
U.S. Wholesale
U.S. Wholesale segment net sales decreased $37.1 million, or 16.6%, to $186.9 million. The decrease was primarily driven by macroeconomic factors, including inflationary pressures, increased interest rates, and risk of recession, as well as planned inventory reductions by our wholesale customers, driving lower consumer replenishment demand. Units sold decreased mid-teens, while average selling prices per unit was relatively consistent period over period.
U.S. Wholesale segment operating income decreased $4.4 million, or 13.1%, to $29.2 million, primarily due to a decrease in gross profit of $5.9 million, partially offset by a decrease in SG&A expenses of $2.4 million. Operating margin increased 60 bps to 15.6%. The primary drivers of the increase in operating margin were a 190 bps increase in gross margin, partially offset by a 100 bps increase in SG&A rate. The increase in gross margin was primarily due to decreased fabric purchase commitment charges and inventory provisions, partially offset by a change in customer mix. Average cost per unit sold was relatively consistent period over period as increased product costs were primarily offset by decreased ocean freight rates. The increase in the SG&A rate was primarily driven by fixed cost deleverage on decreased sales and increased performance-based compensation expense, partially offset by decreased bad debt expense.
International
International segment net sales decreased $7.7 million, or 7.9%, to $89.9 million. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Canadian dollar, had a $1.2 million unfavorable effect on International segment net sales. The decrease in net sales was primarily driven by decreased net sales in Canada and decreased demand from our
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
international partners, partially offset by growth in sales in our Mexico retail stores and increased average selling prices per unit. Units sold decreased low-teens, while average selling prices per unit increased mid-single digits.
Canadian comparable net sales, including retail stores and eCommerce, decreased 7.1% primarily driven by decreased traffic in our retail stores and eCommerce channel. As of July 1, 2023, we operated 186 stores and 50 stores in Canada and Mexico, respectively. As of December 31, 2022, we operated 187 and 49 stores in Canada and Mexico, respectively. As of July 2, 2022, we operated 185 and 43 stores in Canada and Mexico, respectively.
International segment operating income decreased $5.5 million, or 45.0%, to $6.7 million, primarily due to a decrease in gross profit of $2.0 million and an increase in SG&A expenses of $3.0 million. Operating margin decreased 510 bps to 7.4%. The primary drivers of the decrease in operating margin were a 640 bps increase in the SG&A rate, partially offset by a 170 bps increase in gross margin. The increase in gross margin was primarily due to increased average selling prices per unit and decreased fabric purchase commitment charges and inventory provisions, partially offset by increased average cost per unit sold. Average cost per unit sold increased low-single digits, reflecting increases to product input costs, partially offset by decreased ocean freight rates. The increase in the SG&A rate was primarily due to fixed cost deleverage on decreased sales, increased investments in our Mexican retail stores and technology, and increased performance-based compensation expense.
Unallocated Corporate Expenses
Unallocated corporate expenses include corporate overhead expenses that are not directly attributable to one of our business segments and include unallocated accounting, finance, legal, human resources, and information technology expenses, occupancy costs for our corporate headquarters, and other benefit and compensation programs, including performance-based compensation.
Unallocated corporate expenses increased $0.7 million, or 2.6%, to $26.5 million and unallocated corporate expenses, as a percentage of consolidated net sales, increased 70 bps to 4.4%. The increase as a percentage of consolidated net sales was primarily due to fixed cost deleverage on decreased sales, increased consulting and professional fees, and increased performance-based compensation expense.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
TWO FISCAL QUARTERS ENDED JULY 1, 2023 COMPARED TO TWO FISCAL QUARTERS ENDED JULY 2, 2022
The following table summarizes our results of operations. All percentages shown in the below table and the discussion that follows have been calculated using unrounded numbers.
Two fiscal quarters ended
(dollars in thousands, except per share data)July 1, 2023July 2, 2022$ Change% / bps Change
Net sales$1,296,079 $1,481,980 $(185,901)