Carter's, Inc. 2018 Annual Report
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Carter’s, Inc. 2018 Annual Report DEAR FELLOW SHAREHOLDERS, In 2018, we strengthened our position as the market leader in young children’s apparel. We achieved a record level of sales, earnings, and free cash flow despite the bankruptcy and liquidation of two significant wholesale customers. We also strengthened our new growth vehicles, including Skip Hop, Mexico, and Amazon. We continued to invest in omni-channel capabilities to better serve families with young children, and developed a new and more profitable path forward in China. 2018 FINANCIAL HIGHLIGHTS • Increased net sales by 2% to $3.5 billion, our 30th consecutive year of sales growth • Achieved record adjusted diluted earnings per share of $6.29, up 9% vs. 2017 • Generated operating cash flow of $356 million and free cash flow of $292 million • Returned $277 million to shareholders through share repurchases and dividends OUR VISION AND FOCUS We are the largest branded marketer of young children’s apparel in North America. Over the past 10 years, our annual sales and net income have grown, on average, by 9% and 14%, respectively. We believe no other company in the world has our consumer reach and success in branded childrenswear. Our vision is to be the world’s favorite brands in young children’s apparel. To achieve this vision, we are focused on providing the best value and experience in apparel and related products for young children, extending the reach of our brands, and improving profitability. To further focus our efforts in the years ahead, we have developed the following key strategic pillars to help us realize our most meaningful growth opportunities: Win in Baby Carter’s is the best-selling brand in baby apparel, with nearly five times the share of our nearest competitor. Last year, our retail stores were rated as moms’ favorite place to shop for apparel for their newborn to 24-month-old children. In the United States, nearly 90% of millennials shopping for newborn apparel purchased the Carter’s brand last year. Though annual births have trended lower in recent years, we have expanded our customer base through our marketing efforts and are seeing a higher frequency of visits and customer retention. Age Up Carter’s has the largest share of children’s apparel in the baby and toddler age segments (newborn to four year olds), more than three times the share of our nearest competitors. In fall 2018, we launched an extension of our Carter’s product offering to better serve the needs of families with young children. This new strategy was driven by feedback from consumers, which indicated they wished to stay with our Carter’s brand longer. Based on that input, we added new size ranges to better serve a slightly older age segment (five to 10 years old) and gain share in a much larger market. The apparel market for this older age segment is estimated to be $14 billion, comparable to the baby and toddler apparel market. Lead in eCommerce Carter’s is the best-selling brand online in young children’s apparel, with twice the share of our nearest competitor. In recent years, we made significant investments in technology to support the growth in our eCommerce business. In 2019, we are building new capabilities to further strengthen our consumers’ experience shopping with us. Later this year, we expect to enable same-day pickup of online orders in our stores. We believe our new same-day pickup service will further enhance the convenience of shopping with us and drive more traffic to our stores. We have also invested in capabilities which we expect will enable us to ship online orders from our stores. This new service is designed to expedite the fulfillment of eCommerce orders and will be tested with consumers this year. Expand Globally Our brands are sold in about 85 countries through our eCommerce capabilities and relationships with retailers throughout the world. We will continue to pursue opportunities that enable profitable expansion in new markets. We recently restructured our international organization to enable better collaboration between our U.S. operations and our teams in Canada and Mexico. Over the past five years, we have made significant investments in consumer-facing and revenue-driving capabilities in the United States. With this new organization, we plan to leverage those investments and extend those capabilities to support the growth which we envision is possible in North America. GROWTH OBJECTIVES We believe our global, multi-channel business model enables sales growth of about 3% a year, on average, over the next five years. If we achieve this objective, our net sales would increase to approximately $4 billion by 2023. As we view it today, our domestic organic growth rate is about 2% to 3% a year. Over the next five years, we plan to close almost as many stores as we plan to open. With nearly 850 stores in the United States, we are one of the largest specialty retailers of young children’s apparel. We don’t currently see a need for significantly more stores, just better stores in better locations. Given the convenience of shopping with us online, we expect that our eCommerce business will be the largest contributor to growth in our retail segment. Our wholesale customers do a great job presenting our brands in their stores, and they have been good partners and a source of growth for many years. Over time, however, growth in our U.S. wholesale segment may be limited by the growth collectively planned by the largest retailers for their own businesses. Faster sales growth in international markets is possible, but to do so profitably has been challenging. Accordingly, we will pursue a disciplined and profitable pace for growth over the next five years. We aspire to achieve a sales growth rate twice what would otherwise be possible organically. Over the past 15 years, we have acquired brands and businesses that contributed over $1 billion in sales in 2018. Acquisitions have enabled us to strengthen our multi-channel model and reach more consumers with our brands. We search for brands and businesses focused on the needs of families with young children, led by strong management teams with a track record of profitable growth. We will be patient with our search for new brands and businesses to ensure future acquisitions provide new sources of meaningful growth and attractive returns for our shareholders. We are planning average annual growth in earnings per share of approximately 7% over the next five years driven by: - growing our retail, wholesale, and international businesses; - increasing the contribution from Skip Hop, Amazon, Mexico and China; - improving inventory management, sourcing, and pricing disciplines; - leveraging expenses; and - returning capital to shareholders through share repurchases. We believe the fundamentals of our business have never been stronger. We are the largest branded marketer of young children’s apparel in the United States and the largest supplier of young children’s apparel to the largest retailers in the country. We have built a diversified business model which has enabled 30 consecutive years of sales growth, and a cash flow model that has enabled us to return nearly $2 billion in excess capital to shareholders since 2007. Over the past 10 years, we have managed to grow through the recession, the cotton crisis, shifts to private label brands, and our wholesale customers’ de-stocking initiatives. We are now faced with the risk of new tariffs, a further decline in annual births, and wholesale customer store closures. The constant through all of these challenges over the years has been the strength of our brands, which have served the needs of multiple generations of consumers, and the quality of Carter’s employees, who are focused on providing the best value and experience in young children’s apparel. That focus has served us well over the years. In summary, the outlook for our business is good. We have built a unique multi-brand, multi-channel model, which we believe is well-positioned to grow and gain market share. We are committed to strengthening our business and providing good performance for our shareholders in the years ahead. Vanessa Castagna Earlier this year, Vanessa Castagna retired from our Board of Directors. For the past nine years, Vanessa contributed significantly to the transformation of our business into one of the largest specialty retailers of branded childrenswear in North America. We are grateful for Vanessa’s leadership on our Board, and the guidance and friendship she has shared with us. On behalf of our Board of Directors, Leadership Team and all of our dedicated employees, thank you for your investment in Carter’s. Sincerely, Michael D. Casey Chairman and Chief Executive Officer April 2019 OUR BUSINESS Carter’s, Inc. is the largest branded marketer in North America of apparel exclusively for babies and young children. We own the largest share of the $21 billion baby and young children’s apparel market (ages zero to seven) in the United States as well as the $1.5 billion market in Canada. We own two of the best known and trusted brand names in young children’s apparel, Carter’s and OshKosh B’gosh. Both of these iconic brands have more than 100 years of rich history; Carter’s was established in 1865 and OshKosh B’Gosh in 1895. Our Child of Mine brand is sold at Walmart, our Just One You brand is sold at Target, and our Simple Joys brand is available on Amazon. We also own Skip Hop, a fast-growing and innovative leader in the children’s durables product category. Our multi-channel global business model - which includes retail store, eCommerce, and wholesale sales channels - generated $3.5 billion in net sales in 2018 and enables us to reach a broad range of consumers around the world.