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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
|
| | | |
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| |
| | | |
| | | |
| | 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 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
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| | | |
| | | |
| | | |
| |
| | | |
| |
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.
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.
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.
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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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
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.
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 Joys, Precious 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 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 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.
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
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 |
|
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.
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
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 5 – ACCUMULATED 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 – GOODWILL 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 impact | — |
| | — |
| | (2,711 | ) | | (2,711 | ) |
Balance at June 27, 2020 | $ | 83,934 |
| | $ | 74,454 |
| | $ | 50,185 |
| | $ | 208,573 |
|
| |
(*) | In the first quarter of fiscal 2020, a charge of $17.7 million was recorded to reflect the impairment of the value ascribed to the goodwill in the Other International reporting unit in the International segment. |
A summary of the carrying value of the Company's intangible assets were as follows: