CARTERS INC - Quarter Report: 2019 September (Form 10-Q)

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 September 28, 2019

☐ 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 October 18, 2019, there were 44,147,367 shares of the registrant's common stock outstanding.

CARTER’S, INC.

INDEX



			Page
Part I. Financial Information

	Item 1	Financial Statements
		Unaudited Condensed Consolidated Balance Sheets as of September 28, 2019, December 29, 2018 and September 29, 2018	1
		Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and three fiscal quarters ended September 28, 2019 and September 29, 2018	2
		Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and three fiscal quarters ended September 28, 2019 and September 29, 2018	3
		Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity for the fiscal quarters ended September 28, 2019, June 29, 2019, March 30, 2019, September 29, 2018, June 30, 2018 and March 31, 2018	4
		Unaudited Condensed Consolidated Statements of Cash Flows for the three fiscal quarters ended September 28, 2019 and September 29, 2018	6
		Notes to the Unaudited Condensed Consolidated Financial Statements	7
	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	31
	Item 4	Controls and Procedures	31

Part II.Other Information

	Item 1	Legal Proceedings	32
	Item 1A	Risk Factors	32
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	33
	Item 3	Defaults upon Senior Securities	34
	Item 4	Mine Safety Disclosures	34
	Item 5	Other Information	34
	Item 6	Exhibits	34

Signatures			35

Certifications

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARTER’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)



	September 28, 2019			December 29, 2018			September 29, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	153,936		$	170,077		$	123,898
Accounts receivable, net	293,203			258,259			293,489
Finished goods inventories, net	723,242			574,226			692,985
Prepaid expenses and other current assets	53,264			40,396			57,000
Total current assets	1,223,645			1,042,958			1,167,372
Property, plant, and equipment, net of accumulated depreciation of $504,833, $448,898, and $450,460, respectively	330,371			350,437			360,718
Operating lease assets	709,523			—			—
Tradenames, net	334,705			365,692			365,754
Goodwill	228,235			227,101			229,611
Customer relationships, net	41,890			44,511			45,525
Other assets	31,211			28,159			28,966
Total assets	$	2,899,580		$	2,058,858		$	2,197,946

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	205,782		$	199,076		$	185,285
Current operating lease liabilities	158,524			—			—
Other current liabilities	119,862			128,345			133,021
Total current liabilities	484,168			327,421			318,306

Long-term debt	769,525			593,264			798,020
Deferred income taxes	78,916			87,347			87,888
Long-term operating lease liabilities	691,717			—			—
Other long-term liabilities	62,520			181,393			182,547
Total liabilities	$	2,086,846		$	1,189,425		$	1,386,761

Commitments and contingencies - Note 14

Stockholders' equity:
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at September 28, 2019, December 29, 2018, and September 29, 2018	$	—		$	—		$	—
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 44,287,636, 45,629,014 and 46,041,329 shares issued and outstanding at September 28, 2019, December 29, 2018 and September 29, 2018, respectively	443			456			460
Accumulated other comprehensive loss	(38,908		)	(40,839		)	(32,318		)
Retained earnings	851,199			909,816			843,043
Total stockholders' equity	812,734			869,433			811,185
Total liabilities and stockholders' equity	$	2,899,580		$	2,058,858		$	2,197,946

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						Three fiscal quarters ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Net sales	$	943,322		$	923,907		$	2,418,764		$	2,375,890
Cost of goods sold	541,111			536,457			1,377,690			1,346,005
Gross profit	402,211			387,450			1,041,074			1,029,885
Royalty income, net	9,192			10,224			27,371			28,573
Selling, general, and administrative expenses	296,733			294,117			828,540			837,621
Intangible asset impairment	30,800			—			30,800			—
Operating income	83,870			103,557			209,105			220,837
Interest expense	9,966			9,868			28,667			25,790
Interest income	(200		)	(84		)	(937		)	(474		)
Other expense (income), net	483			(66		)	474			528
Loss on extinguishment of debt	—			—			7,823			—
Income before income taxes	73,621			93,839			173,078			194,993
Provision for income taxes	13,369			22,069			34,423			43,487
Net income	$	60,252		$	71,770		$	138,655		$	151,506

Basic net income per common share	$	1.35		$	1.55		$	3.08		$	3.24
Diluted net income per common share	$	1.34		$	1.53		$	3.06		$	3.20
Dividend declared and paid per common share	$	0.50		$	0.45		$	1.50		$	1.35

See accompanying notes to the unaudited condensed consolidated financial statements.

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)



	Fiscal quarter ended					Three fiscal quarters ended
	September 28, 2019			September 29, 2018		September 28, 2019		September 29, 2018
Net income	$	60,252		$	71,770	$	138,655	$	151,506
Other comprehensive income:
Foreign currency translation adjustments	(2,347		)	3,213		3,431		(3,225		)
Comprehensive income	$	57,905		$	74,983	$	142,086	$	148,281

See accompanying notes to the unaudited condensed consolidated financial statements.

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(amounts in thousands, except share amounts)

(unaudited)

Three fiscal quarters ended September 28, 2019:



	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
Exercise of stock options	8,490		—			535			—			—			535
Withholdings from vesting of restricted stock	(1,013	)	—			(88		)	—			—			(88		)
Restricted stock activity	13,639		—			—			—			—			—
Stock-based compensation expense	—		—			3,733			—			—			3,733
Repurchase of common stock	(602,043	)	(6		)	(4,180		)	—			(50,835		)	(55,021		)
Cash dividends declared and paid	—		—			—			—			(22,227		)	(22,227		)
Comprehensive income	—		—			—			(2,347		)	60,252			57,905
Balance at September 28, 2019	44,287,636		$	443		$	—		$	(38,908	)	$	851,199		$	812,734


(*)	The Company reclassified $1.5 million of tax benefits from "Accumulated other comprehensive loss" to "Retained earnings" for the tax effects resulting from the December 22, 2017 enactment of the Tax Cut and Jobs Act in accordance with the adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of fiscal 2019.

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(amounts in thousands, except share amounts)

(unaudited)

Three fiscal quarters ended September 29, 2018:



	Common stock - shares		Common stock - $			Additional paid-in capital			Accumulated other comprehensive loss			Retained earnings			Total stockholders’ equity
Balance at December 30, 2017	47,178,346		$	472		$	—		$	(29,093	)	$	886,037		$	857,416
Exercise of stock options	95,006		1			4,768			—			—			4,769
Withholdings from vesting of restricted stock	(55,164	)	(1		)	(6,582		)	—			—			(6,583		)
Restricted stock activity	116,701		1			(1		)	—			—			—
Stock-based compensation expense	—		—			4,944			—			—			4,944
Repurchases of common stock	(221,313	)	(2		)	(3,129		)	—			(22,064		)	(25,195		)
Cash dividends declared and paid	—		—			—			—			(21,244		)	(21,244		)
Comprehensive income	—		—			—			(1,762		)	42,469			40,707
Balance at March 31, 2018	47,113,576		$	471		$	—		$	(30,855	)	$	885,198		$	854,814
Exercise of stock options	47,081		1			2,606			—			—			2,607
Withholdings from vesting of restricted stock	(769	)	—			(84		)	—			—			(84		)
Restricted stock activity	4,869		—			—			—			—			—
Stock-based compensation expense	—		—			5,322			—			—			5,322
Repurchases of common stock	(599,314	)	(6		)	(7,844		)	—			(56,048		)	(63,898		)
Cash dividends declared and paid	—		—			—			—			(21,023		)	(21,023		)
Comprehensive income	—		—			—			(4,677		)	37,268			32,591
Balance at June 30, 2018	46,565,443		$	466		$	—		$	(35,532	)	$	845,395		$	810,329
Exercise of stock options	18,276		—			1,356			—			—			1,356
Withholdings from vesting of restricted stock	(735	)	—			(80		)	—			—			(80		)
Restricted stock activity	2,138		—			—			—			—			—
Stock-based compensation expense	—		—			1,844			—			—			1,844
Repurchases of common stock	(543,793	)	(6		)	(3,120		)	—			(53,275		)	(56,401		)
Cash dividends declared and paid	—		—			—			—			(20,847		)	(20,847		)
Comprehensive income	—		—			—			3,213			71,770			74,983
Other	—		—			—			1			—			1
Balance at September 29, 2018	46,041,329		$	460		$	—		$	(32,318	)	$	843,043		$	811,185

See accompanying notes to the unaudited condensed consolidated financial statements.

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)



	Three fiscal quarters ended
	September 28, 2019			September 29, 2018
Cash flows from operating activities:
Net income	$	138,655		$	151,506
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant, and equipment	68,005			63,441
Amortization of intangible assets	2,810			2,783
Amortization of debt issuance costs	1,087			1,303
Stock-based compensation expense	13,540			12,110
Unrealized foreign currency exchange (gain) loss, net	176			(68		)
Provisions for (recoveries of) doubtful accounts receivable from customers	(2,063		)	15,547
Intangible asset impairment	30,800			—
Loss on extinguishment of debt	7,823			—
Loss on disposal of property, plant, and equipment, net of recoveries	407			516
Deferred income taxes	8,300			(3,173		)
Effect of changes in operating assets and liabilities:
Accounts receivable	(32,792		)	(68,333		)
Finished goods inventories	(147,456		)	(145,709		)
Prepaid expenses and other assets	(725,597		)	(5,312		)
Accounts payable and other liabilities	709,660			(3,253		)
Net cash provided by operating activities	$	73,355		$	21,358

Cash flows from investing activities:
Capital expenditures	$	(46,138	)	$	(47,844	)
Acquisitions of businesses, net of cash acquired	—			96
Disposals and recoveries from property, plant, and equipment	749			376
Net cash used in investing activities	$	(45,389	)	$	(47,372	)

Cash flows from financing activities:
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	(5,793		)	(890		)
Borrowings under secured revolving credit facility	265,000			290,000
Payments on secured revolving credit facility	(186,000		)	(110,000		)
Repurchases of common stock	(147,464		)	(145,493		)
Dividends paid	(67,528		)	(63,114		)
Withholdings from vestings of restricted stock	(4,214		)	(6,747		)
Proceeds from exercises of stock options	6,881			8,732
Net cash used in financing activities	$	(44,370	)	$	(27,512	)

Effect of exchange rate changes on cash and cash equivalents	263			(1,070		)
Net decrease in cash and cash equivalents	$	(16,141	)	$	(54,596	)
Cash and cash equivalents, beginning of period	170,077			178,494
Cash and cash equivalents, end of period	$	153,936		$	123,898

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 under the Carter's, Child of Mine, Just One You, Precious Firsts, Precious Baby, Simple Joys, OshKosh B'gosh ("OshKosh"), Skip Hop 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 products manufactured by other companies. As of September 28, 2019, the Company operated 1,087 retail stores in the United States, Canada, and Mexico.

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, 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 September 28, 2019 are not necessarily indicative of the results that may be expected for the current fiscal year ending December 28, 2019.

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 29, 2018 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.

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, except as noted below for new accounting pronouncements adopted at the beginning of fiscal 2019.

Leases

At the beginning of fiscal 2019, the Company adopted the provisions of ASC No. 842, Leases ("ASC 842"), using a modified retrospective approach as an optional transition method. This approach allows the Company to apply the standard and related disclosures to the financial statements for the period of adoption and to apply the old guidance in the comparative periods.

The standard had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated income statements or statement of cash flows. The most significant impact was the recognition of right of use ("ROU") assets and lease liabilities for operating leases. Finance leases are not material to the Company's consolidated balance sheets, consolidated statements of operations or statements of cash flows.

Financial Presentation

The Company determines if an arrangement is a lease at its inception. Operating leases are included in operating lease assets, current operating lease liabilities, and long-term operating lease liabilities in our consolidated balance sheets.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

The operating lease ROU asset also includes initial direct costs and excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term.

Certain of our lease agreements include variable rental payments based on a percentage of retail sales over contractual levels and others include variable rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Policy Elections

Practical Expedient Package - The Company has elected the following expedients and applied them consistently to all leases:


◦	The Company will not revisit whether a contract is, or contains, a lease under the ASC 842 definition of a lease.


◦	The lease classification determined under prior guidance will not be reevaluated under ASC 842.


◦	Previously capitalized initial direct costs under prior guidance will be carried forward. Any initial direct costs after the effective date will be included within the ROU asset under ASC 842.

Portfolio approach - In general, the Company accounts for the underlying leased asset and applies a discount rate at the lease level. However, there are certain non-real estate leases for which the Company utilizes the portfolio method by aggregating similar leased assets based on the underlying lease term.

Non-lease component - The Company has lease agreements with lease and non-lease components. The Company has elected a policy to account for lease and non-lease components as a single component for all asset classes.

Short-term lease - Leases with an initial term of 12 months or less are not recorded on the balance sheets.

Discount rate - As most of the Company's leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

Renewal options - The Company evaluates the inclusion of renewal options on a lease by lease basis. In general, for leased retail real estate, the Company does not include renewal options in the underlying lease term.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02)

In the first quarter of fiscal 2019, the Company adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). The adoption of ASU 2018-02 allowed the Company to move "stranded" tax amounts from its accumulated other comprehensive loss to retained earnings. The effect of the adoption of ASU 2018-02 was not material to the Company's financial position and did not have an effect on the Company's consolidated results of operations or cash flows.

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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 its licensees. Disaggregated revenues from these sources for the third quarter and three quarters ended fiscal 2019 and 2018 were as follows:



	Fiscal quarter ended September 28, 2019
(dollars in thousands)	U.S. Retail		U.S. Wholesale		International		Total
Wholesale channel	$	—	$	352,256	$	56,101	$	408,357
Direct-to-consumer	464,100		—		70,865		534,965
	$	464,100	$	352,256	$	126,966	$	943,322

Royalty income	$	4,244	$	4,038	$	910	$	9,192



	Three fiscal quarters ended September 28, 2019
(dollars in thousands)	U.S. Retail		U.S. Wholesale		International		Total
Wholesale channel	$	—	$	856,713	$	121,631	$	978,344
Direct-to-consumer	1,264,283		—		176,137		1,440,420
	$	1,264,283	$	856,713	$	297,768	$	2,418,764

Royalty income	$	10,688	$	14,051	$	2,632	$	27,371



	Fiscal quarter ended September 29, 2018
(dollars in thousands)	U.S. Retail		U.S. Wholesale		International		Total
Wholesale channel	$	—	$	338,963	$	54,373	$	393,336
Direct-to-consumer	459,101		—		71,470		530,571
	$	459,101	$	338,963	$	125,843	$	923,907

Royalty income	$	3,614	$	5,891	$	719	$	10,224



	Three fiscal quarters ended September 29, 2018
(dollars in thousands)	U.S. Retail		U.S. Wholesale		International		Total
Wholesale channel	$	—	$	829,272	$	117,255	$	946,527
Direct-to-consumer	1,244,863		—		184,500		1,429,363
	$	1,244,863	$	829,272	$	301,755	$	2,375,890

Royalty income	$	9,625	$	16,693	$	2,255	$	28,573

Accounts Receivable from Customers and Licensees

The components of Accounts receivable, net, were as follows:



(dollars in thousands)	September 28, 2019			December 29, 2018			September 29, 2018
Trade receivables from wholesale customers, net	$	278,573		$	244,258		$	281,190
Royalties receivable	9,128			9,279			9,667
Tenant allowances and other receivables	16,281			16,588			14,165
Total gross receivables	$	303,982		$	270,125		$	305,022
Less:
Wholesale accounts receivable reserves	(10,779		)	(11,866		)	(11,533		)
Accounts receivable, net	$	293,203		$	258,259		$	293,489

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Contract Assets and Liabilities

The Company's contract assets are not material.

The Company recognizes a contract liability when it has received consideration from the customer and has a future obligation to transfer goods to the customer. Total contract liabilities consisted of the following amounts:



(dollars in thousands)	September 28, 2019		December 29, 2018		September 29, 2018
Contract liabilities - current:
Unredeemed gift cards	$	14,264	$	14,471	$	11,304
Unredeemed customer loyalty rewards	5,109		7,764		8,441
Private label credit card - signing bonus⁽¹⁾	714		714		—
Total contract liabilities - current⁽²⁾	$	20,087	$	22,949	$	19,745


(1)	Private label credit card - signing bonus - reflects the amount that the Company received as an upfront signing bonus from the third-party financial institution for the private label credit card program. The amount is recognized as revenue on a straight-line basis over the term of the agreement.


(2)	Included with Other current liabilities on the Company's consolidated balance sheet.

The Company's long-term contract liabilities are not material.

NOTE 4 - LEASES

We have operating leases for retail stores, distribution centers, corporate offices, data centers, and certain equipment. Our leases have remaining lease terms of 1 year to 20 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 September 28, 2019, the Company's finance leases were not material to the consolidated balance sheets, consolidated statements of operations or statement of cash flows.

The following components of lease expense are included in Selling, general and administrative expenses on the Company's consolidated statements of operations for the third quarter and three quarters of fiscal 2019:



	Fiscal quarter ended		Three fiscal quarters ended
(dollars in thousands)	September 28, 2019		September 28, 2019
Operating lease cost	$	45,584	$	133,491
Variable lease cost ^(*)	15,492		46,692
Net lease cost	$	61,076	$	180,183


(*)	Includes short-term leases, which are immaterial.

As of September 28, 2019, the weighted-average remaining operating lease term was 6.1 years and the weighted-average discount rate for operating leases was 4.39%.

Cash paid for amounts included in the measurement of operating lease liabilities in the third quarter and three quarters of fiscal 2019 was $48.5 million and $143.7 million, respectively.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of September 28, 2019, the maturities of lease liabilities were as follows:



(dollars in thousands)	Operating leases
Remainder of 2019	$	49,210
2020	189,604
2021	172,278
2022	148,813
2023	123,551
After 2023	292,747
Total lease payments	$	976,203
Less: Interest	(125,962		)
Present value of lease liabilities(*)	$	850,241


(*)	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 September 28, 2019, the minimum rental commitments for additional operating lease contracts that have not yet commenced, primarily for retail stores, is $19.2 million. These operating leases will commence between fiscal year 2019 and fiscal year 2023 with lease terms of 5 years to 10 years.

As of December 29, 2018, the minimum annual rental commitments under current non-cancellable operating leases were as follows:



(dollars in thousands)	Operating leases
2019	$	163,963
2020	150,010
2021	134,203
2022	116,773
2023	102,487
Thereafter	235,731
Total	$	903,167

NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss consisted of the following:



(dollars in thousands)	September 28, 2019			December 29, 2018			September 29, 2018
Cumulative foreign currency translation adjustments	$	(29,533	)	$	(32,964	)	$	(24,510	)
Pension and post-retirement obligations^(*)	(9,375		)	(7,875		)	(7,808		)
Total accumulated other comprehensive loss	$	(38,908	)	$	(40,839	)	$	(32,318	)


(*)	Net of income taxes of $2.9 million, $4.4 million, and $4.4 million, respectively.

During the first three quarters of both fiscal 2019 and fiscal 2018, 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 Company's goodwill and intangible assets were as follows:



		September 28, 2019						December 29, 2018
(dollars in thousands)	Weighted-average useful life	Gross amount		Accumulated amortization		Net amount		Gross amount		Accumulated amortization		Net amount
Carter's goodwill⁽¹⁾	Indefinite	$	136,570	$	—	$	136,570	$	136,570	$	—	$	136,570
Canada goodwill⁽²⁾	Indefinite	40,032		—		40,032		38,869		—		38,869
Skip Hop goodwill⁽³⁾	Indefinite	45,940		—		45,940		45,960		—		45,960
Carter's Mexico goodwill⁽⁴⁾	Indefinite	5,693		—		5,693		5,702		—		5,702
Total goodwill		$	228,235	$	—	$	228,235	$	227,101	$	—	$	227,101

Carter's tradename	Indefinite	$	220,233	$	—	$	220,233	$	220,233	$	—	$	220,233
OshKosh tradename	Indefinite	85,500		—		85,500		85,500		—		85,500
Skip Hop tradename⁽⁵⁾	Indefinite	26,000		—		26,000		56,800		—		56,800
Finite-life tradenames	5-20 years	3,911		939		2,972		3,911		752		3,159
Total tradenames, net		$	335,644	$	939	$	334,705	$	366,444	$	752	$	365,692

Skip Hop customer relationships	15 years	$	47,300	$	7,863	$	39,437	$	47,300	$	5,480	$	41,820
Carter's Mexico customer relationships	10 years	3,148		695		2,453		3,146		455		2,691
Total customer relationships, net		$	50,448	$	8,558	$	41,890	$	50,446	$	5,935	$	44,511



		September 29, 2018
(dollars in thousands)	Weighted-average useful life	Gross amount		Accumulated amortization		Net amount
Carter's goodwill⁽¹⁾	Indefinite	$	136,570	$	—	$	136,570
Canada goodwill⁽²⁾	Indefinite	41,074		—		41,074
Skip Hop goodwill⁽³⁾	Indefinite	45,976		—		45,976
Carter's Mexico goodwill⁽⁴⁾	Indefinite	5,991		—		5,991
Total goodwill		$	229,611	$	—	$	229,611

Carter's tradename	Indefinite	$	220,233	$	—	$	220,233
OshKosh tradename	Indefinite	85,500		—		85,500
Skip Hop tradename	Indefinite	56,800		—		56,800
Finite-life tradenames	5-20 years	3,911		690		3,221
Total tradenames, net		$	366,444	$	690	$	365,754

Skip Hop customer relationships	15 years	$	47,300	$	4,686	$	42,614
Carter's Mexico customer relationships	10 years	3,289		378		2,911
Total customer relationships, net		$	50,589	$	5,064	$	45,525


(1)	$45.9 million is assigned to the U.S. Wholesale segment, $82.0 million is assigned to the U.S. Retail segment, and $8.6 million is assigned to the International segment.


(2)	Goodwill for Canada (Bonnie Togs) is assigned to the International segment.


(3)	$28.6 million is assigned to the U.S. Wholesale segment, $15.5 million is assigned to the International segment, and $1.9 million is assigned to the U.S. Retail segment.


(4)	Goodwill for Carter's Mexico is assigned to the International segment.


(5)	Fiscal quarter ended September 28, 2019 includes a tradename impairment charge of $30.8 million.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company's Skip Hop business has experienced lower than expected actual and projected sales and profitability due to lower domestic demand, including the loss of a significant customer (Toys "R" Us), lower international demand and higher product costs primarily drive by tariffs imposed on products sourced from China. As a result, the Company conducted an interim impairment assessment on the value of the Company's indefinite-lived Skip Hop tradename asset that was recorded in connection with the acquisition of Skip Hop Holdings, Inc. in February 2017. The indefinite-lived tradename asset assessment was performed in accordance with Accounting Standards Codification ("ASC") 350, "Intangibles--Goodwill and Other" and was determined using a discounted cash flow analysis which examined the hypothetical cost savings that accrue as a result of our ownership of the tradename. Based on this assessment, a charge of $19.1 million, $10.5 million, and $1.2 million was 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 Company's indefinite-lived Skip Hop tradename asset after the impairment charge was $26.0 million.

Amortization expense for intangible assets subject to amortization was approximately $0.9 million for both the third fiscal quarter ended September 28, 2019 and third fiscal quarter ended September 29, 2018. For both the first three quarters of fiscal 2019 and fiscal 2018, amortization expense was approximately $2.8 million.

The estimated amortization expense for the next five fiscal years is as follows:



(dollars in thousands)	Amortization
2020	$	3,739
2021	$	3,739
2022	$	3,739
2023	$	3,697
2024	$	3,667

NOTE 7 – COMMON STOCK

Open Market Share Repurchases

The total aggregate remaining capacity under outstanding repurchase authorizations as of September 28, 2019 was approximately $245.1 million, based on settled repurchase transactions. The authorizations have no expiration date.

The Company repurchased and retired shares in open market transactions in the following amounts for the fiscal periods indicated:



	Fiscal quarter ended				Three fiscal quarters ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Number of shares repurchased	602,043		543,793		1,607,920		1,364,420
Aggregate cost of shares repurchased (dollars in thousands)	$	55,021	$	56,401	$	147,464	$	145,493
Average price per share	$	91.39	$	103.72	$	91.71	$	106.63

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 determined by the Company's management, based on its evaluation of market conditions, share price, other investment priorities, and other factors.

Dividends

In the third fiscal and three fiscal quarters ended September 28, 2019, the Company declared and paid cash dividends per share of $0.50 and $1.50, respectively. In the third fiscal and three fiscal quarters ended September 29, 2018, the Company declared and paid cash dividends per share of $0.45 and $1.35, respectively. Future declarations of dividends and the establishment of future record and payment dates are at the discretion of the Company's Board of Directors and are based on a number of factors, including the Company's future financial performance and other investment priorities.

Provisions in the Company's secured revolving credit facility could have the effect of restricting the Company's ability to pay future cash dividends on, or make future repurchases of, its common stock, as described in the Company's Annual Report on Form 10-K for the 2018 fiscal year ended December 29, 2018.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 – LONG-TERM DEBT

Long-term debt consisted of the following:



(dollars in thousands)	September 28, 2019			December 29, 2018			September 29, 2018
Senior notes at amounts repayable	$	500,000		$	400,000		$	400,000
Less unamortized issuance-related costs for senior notes	(5,475		)	(2,736		)	(2,980		)
Senior notes, net	$	494,525		$	397,264		$	397,020
Secured revolving credit facility	275,000			196,000			401,000
Total long-term debt, net	$	769,525		$	593,264		$	798,020

Secured Revolving Credit Facility

As of September 28, 2019, the Company had $275.0 million in outstanding borrowings under its secured revolving credit facility, exclusive of $5.0 million of outstanding letters of credit. As of September 28, 2019, approximately $470.0 million remained 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 consolidated balance sheet because of the contractual repayment terms under the credit facility.

As of September 28, 2019, the interest rate margins applicable to the secured revolving credit facility were 1.375% for LIBOR (London Interbank Offered Rate) rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 1.125% to 1.875%) and 0.375% for base rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 0.125% to 0.875%).

As of September 28, 2019, U.S. dollar borrowings outstanding under the secured revolving credit facility accrued interest at a LIBOR rate plus the applicable margin, which resulted in a weighted-average borrowing rate of 3.41%. There were no Canadian dollar or other foreign currency borrowings outstanding on September 28, 2019.

As of September 28, 2019, the Company was in compliance with the financial and other covenants under the secured revolving credit facility.

Senior Notes

On March 14, 2019, the Company's wholly-owned subsidiary, The William Carter Company ("TWCC"), redeemed $400 million principal amount of senior notes, bearing interest at a rate of 5.25% per annum, and maturing on August 15, 2021, pursuant to the optional redemption provisions of the notes, which required that TWCC pay the outstanding principal plus accrued interest and an early redemption premium of 1.31% of the outstanding principal amounts of the senior notes. This debt redemption resulted in a loss on extinguishment of debt of $7.8 million, consisting of $5.2 million of early redemption premiums and $2.6 million of unamortized debt issuance costs.

Concurrently, TWCC issued $500 million principal amount of senior notes at par, bearing interest at a rate of 5.625% per annum, and maturing on March 15, 2027, all of which were outstanding as of September 28, 2019. TWCC received net proceeds from the offering of the senior notes of approximately $494.8 million, after deducting underwriting fees and other expenses, which TWCC used to redeem the senior notes discussed above and repay borrowings outstanding under the Company's secured revolving credit facility. As of September 28, 2019, approximately $5.8 million, including both bank fees and other third party expenses, has been capitalized in connection with the issuance and is being amortized over the term of the senior notes.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 – STOCK-BASED COMPENSATION

The Company recorded stock-based compensation expense as follows:



	Fiscal quarter ended					Three fiscal quarters ended
(dollars in thousands)	September 28, 2019		September 29, 2018			September 28, 2019		September 29, 2018
Stock options	$	904	$	1,148		$	3,146	$	3,604
Restricted stock:
Time-based awards	2,288		1,881			7,034		5,989
Performance-based awards	299		(1,185		)	1,957		1,314
Stock awards	242		—			1,403		1,203
Total	$	3,733	$	1,844		$	13,540	$	12,110

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 third fiscal quarter of 2019, the achievement of performance target estimates related to certain performance-based grants were revised resulting in a $0.5 million reduction to stock compensation expense.

NOTE 10 – INCOME TAXES

As of September 28, 2019, the Company had gross unrecognized income tax benefits of approximately $14.4 million, of which $12.3 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 September 28, 2019 is approximately $2.2 million of reserves for which the statute of limitations is expected to expire within the next fiscal year. If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective income tax rate for fiscal 2019 or fiscal 2020 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. During the third fiscal quarters ended September 28, 2019 and September 29, 2018, interest expense recorded on uncertain tax positions was not material. During the first three quarters of fiscal 2019, interest expense recorded on uncertain tax positions was $0.7 million, and during the first three quarters of fiscal 2018, interest expense recorded on uncertain tax positions was not material. The Company had approximately $2.5 million, $1.8 million, and $1.9 million of interest accrued on uncertain tax positions as of September 28, 2019, December 29, 2018, and September 29, 2018, respectively.

NOTE 11 – 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 consolidated balance sheets, and their aggregate fair values were approximately $18.2 million, $15.7 million, and $17.6 million at September 28, 2019, December 29, 2018, and September 29, 2018, respectively. These investments are classified as Level 1 within the fair value hierarchy. Gains on the investments in marketable securities were $0.9 million and $2.5 million for the third fiscal quarter and the three fiscal quarters ended September 28, 2019, respectively, and were $0.7 million and $0.9 million for the third fiscal quarter and the three fiscal quarters ended September 29, 2018, respectively.These amounts are included in Other expense (income), net on the Company's consolidated statement of operations.

Borrowings

As of September 28, 2019, the fair value of the Company's $275.0 million in outstanding borrowings under its secured revolving credit facility approximated the carrying value.

The fair value of the Company's senior notes at September 28, 2019 was approximately $536.0 million. The fair value of these senior notes with a notional value and carrying value (gross of debt cost) of $500 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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible assets are tested annually or if a triggering event occurs that indicates an impairment loss may have been incurred using fair value measurements with unobservable inputs (Level 3).

The Company’s Skip Hop business has experienced lower than expected actual and projected sales and profitability due to lower domestic demand, including the loss of a significant customer (Toys “R” Us), lower international demand and higher product costs primarily driven by tariffs imposed on products sourced from China. As a result, the Company conducted an interim impairment assessment on the value of the Company's indefinite-lived Skip Hop tradename asset that was recorded in connection with the acquisition of Skip Hop Holdings, Inc. in February 2017. Based on this assessment, a charge of $19.1 million, $10.5 million, and $1.2 million was 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 Company's indefinite-lived Skip Hop tradename asset after the impairment charge was $26.0 million. See Note 6, Goodwill and Intangibles, for further details on the impairment charge and valuation methodologies.

NOTE 12 – EARNINGS PER SHARE

The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:



	Fiscal quarter ended						Three fiscal quarters ended
	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Weighted-average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding	44,144,135			45,990,039			44,640,413			46,399,746
Dilutive effect of equity awards	287,904			490,283			302,832			538,422
Diluted number of common and common equivalent shares outstanding	44,432,039			46,480,322			44,943,245			46,938,168

Basic net income per common share (in thousands, except per share data):
Net income	$	60,252		$	71,770		$	138,655		$	151,506
Income allocated to participating securities	(565		)	(540		)	(1,244		)	(1,142		)
Net income available to common shareholders	$	59,687		$	71,230		$	137,411		$	150,364

Basic net income per common share	$	1.35		$	1.55		$	3.08		$	3.24

Diluted net income per common share (in thousands, except per share data):
Net income	$	60,252		$	71,770		$	138,655		$	151,506
Income allocated to participating securities	(563		)	(536		)	(1,239		)	(1,134		)
Net income available to common shareholders	$	59,689		$	71,234		$	137,416		$	150,372

Diluted net income per common share	$	1.34		$	1.53		$	3.06		$	3.20

Anti-dilutive awards excluded from diluted earnings per share computation	691,707			326,129			505,642			266,646

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 – OTHER CURRENT AND LONG-TERM LIABILITIES

Other current liabilities that exceeded five percent of total current liabilities, at the end of any comparable period, were as follows:



(dollars in thousands)	September 28, 2019		December 29, 2018		September 29, 2018
Income taxes payable	$	26,909	$	17,415	$	21,124
Accrued employee benefits	12,509		16,421		13,987
Accrued and deferred rent	322		19,120		19,137

Other long-term liabilities that exceeded five percent of total liabilities, at the end of any comparable period, were as follows:



(dollars in thousands)	September 28, 2019		December 29, 2018		September 29, 2018
Deferred lease incentives	$	—	$	72,345	$	75,331

NOTE 14 – 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 also include obligations associated with leases, the secured revolving credit agreement, senior notes, employee benefit plans, and facility consolidations/closures as disclosed elsewhere in the notes to the consolidated financial statements.

NOTE 15 – SEGMENT INFORMATION

The table below presents certain information for our reportable segments and unallocated corporate expenses for the periods indicated:



	Fiscal quarter ended										Three fiscal quarters ended
(dollars in thousands)	September 28, 2019			% of Total Net Sales		September 29, 2018			% of Total Net Sales		September 28, 2019			% of Total Net Sales		September 29, 2018			% of Total Net Sales
Net sales:
U.S. Retail	$	464,100		49.2	%	$	459,101		49.7	%	$	1,264,283		52.3	%	$	1,244,863		52.4	%
U.S. Wholesale	352,256			37.3	%	338,963			36.7	%	856,713			35.4	%	829,272			34.9	%
International	126,966			13.5	%	125,843			13.6	%	297,768			12.3	%	301,755			12.7	%
Total net sales	$	943,322		100.0	%	$	923,907		100.0	%	$	2,418,764		100.0	%	$	2,375,890		100.0	%

Operating income:				% of Segment Net Sales					% of Segment Net Sales					% of Segment Net Sales					% of Segment Net Sales
U.S. Retail^(1)(2)(8)	$	49,472		10.7	%	$	47,139		10.3	%	$	124,567		9.9	%	$	122,086		9.8	%
U.S. Wholesale⁽³⁾⁽⁸⁾	54,391			15.4	%	67,785			20.0	%	145,181			16.9	%	148,395			17.9	%
International^(4)(7)(8)	6,136			4.8	%	12,434			9.9	%	15,351			5.2	%	20,508			6.8	%
Corporate expenses⁽⁵⁾⁽⁶⁾	(26,129		)			(23,801		)			(75,994		)			(70,152		)
Total operating income	$	83,870		8.9	%	$	103,557		11.2	%	$	209,105		8.6	%	$	220,837		9.3	%


(1)	Three fiscal quarters ended September 28, 2019 includes a $0.7 million reversal of retail store restructuring costs previously recorded during the third quarter of fiscal 2017.


(2)	Three fiscal quarters ended September 29, 2018 includes insurance recovery of approximately $0.4 million associated with storm-related store closures.


(3)	Three fiscal quarters ended September 29, 2018 includes approximately $12.8 million of charges related to a customer bankruptcy.


(4)	Three fiscal quarters ended September 28, 2019 includes a benefit of $2.1 million related to sale of inventory previously reserved in China.


(5)	Three fiscal quarters ended September 28, 2019 includes $1.6 million in charges related to organizational restructuring.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


(6)	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.


(7)	Fiscal quarter and three fiscal quarters ended September 29, 2018 include approximately $3.5 million in costs associated with changes to the Company's business model in China, which includes inventory and severance charges.


(8)	Fiscal quarter and three fiscal quarters ended September 28, 2019 include an impairment of the Company's indefinite-lived Skip Hop tradename asset of $19.1 million, $10.5 million, and $1.2 million recorded to the U.S. Wholesale, International, and U.S. Retail segments, respectively.

NOTE 16 – PENDING ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

Credit Losses (ASU 2016-13)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This new guidance will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 will replace the current "incurred loss" model with an "expected loss" model. Under the "incurred loss" model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been "incurred"). Under the "expected loss" model, an entity will 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 "incurred loss" model considers past events and current conditions, while the "expected loss" model includes expectations for the future which have yet to occur. ASU 2016-13 will be effective for the Company at the beginning of fiscal 2020 with early adoption permitted for fiscal 2019, including interim periods therein. The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the impact that ASU 2016-13 may have on the timing of recognizing future provisions for expected losses on the Company's accounts receivable.

Goodwill Impairment Testing (ASU 2017-04)

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 will eliminate 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 affected reporting unit. ASU 2017-04 will not change the current guidance for completing Step 1 of the goodwill impairment test, and an entity will still be able to perform the current optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. Upon adoption, ASU 2017-04 will be applied prospectively. Adoption for the Company will be effective for annual and interim impairment tests performed beginning in fiscal 2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The impact that ASU 2017-04 may have on the Company's financial condition or results of operations will depend on the circumstances of any goodwill impairment event that may occur after adoption.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 relating to our future performance, including, without limitation, statements with respect to our anticipated financial results for any other quarter or period in fiscal 2019 or any other future period, assessment of our performance and financial position, and drivers of our sales and earnings growth. Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or not materialize, or should any of the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. Certain of the risks and uncertainties that could cause actual results and performance to differ materially are described under the heading "Risk Factors" in our most recently filed Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission from time to time.

OVERVIEW

We are the largest branded marketer in North America of apparel exclusively for babies and young children. We own two of the most highly recognized and most trusted brand names in the children's apparel industry, Carter's and OshKosh B'gosh (or "OshKosh"), and a leading baby and young child lifestyle brand, Skip Hop.

Established in 1865, our Carter's brand is recognized and trusted by consumers for high-quality apparel for children in sizes newborn to 14 and accessories.

Established in 1895, OshKosh is a well-known brand, trusted by consumers for apparel for children in sizes newborn to 14, with a focus on playclothes for toddlers and young children, and accessories.

Established in 2003, the Skip Hop brand re-thinks, re-energizes, and re-imagines durable childhood necessities to create higher value, superior quality, and top-performance goods for parents, babies, and toddlers. We acquired the Skip Hop brand in February 2017.

Our vision is to be the leader in baby and young children's apparel and accessories, and to consistently provide high-quality products at a compelling value to consumers. Our multi-channel, global business model - which includes retail stores, eCommerce and wholesale channels - enables us to reach a broad range of consumers around the world. We have extensive experience in the young children's apparel and accessories market and focus on delivering products that satisfy our consumers' needs.

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 2018 fiscal year ended December 29, 2018.

Segments

The three segments we use to manage and evaluate our performance 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 and online stores. Similarly, our U.S. Wholesale segment consists of revenue primarily from sales in the United States of products to our wholesale customers. Finally, our International segment consists of revenue primarily from sales of products outside the United States, largely through our retail stores in Canada and Mexico, our eCommerce site in Canada, and sales to our international wholesale customers and licensees.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of consolidated net sales:



	Fiscal quarter ended				Three fiscal quarters ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Net sales
U.S. Retail	49.2	%	49.7	%	52.3	%	52.4	%
U.S. Wholesale	37.3	%	36.7	%	35.4	%	34.9	%
International	13.5	%	13.6	%	12.3	%	12.7	%

Consolidated net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	57.4	%	58.1	%	57.0	%	56.7	%

Gross profit	42.6	%	41.9	%	43.0	%	43.3	%
Royalty income	1.0	%	1.1	%	1.1	%	1.2	%
Selling, general, and administrative expenses	31.5	%	31.8	%	34.3	%	35.3	%
Intangible asset impairment	3.3	%	—	%	1.3	%	—	%

Operating income	8.9	%	11.2	%	8.6	%	9.3	%
Interest expense	1.1	%	1.1	%	1.2	%	1.1	%
Interest income	n/m		n/m		n/m		n/m
Other expense (income), net	n/m		n/m		n/m		n/m
Loss on extinguishment of debt	—	%	—	%	0.3	%	—	%

Income before income taxes	7.8	%	10.2	%	7.2	%	8.2	%
Provision for income taxes	1.4	%	2.4	%	1.4	%	1.8	%
Net income	6.4	%	7.8	%	5.7	%	6.4	%

n/m - not material.

Note: Results may not be additive due to rounding.

Comparable Retail Sales Metrics

Our management's discussion and analysis includes comparable sales metrics for our company-owned retail stores and our eCommerce sites in our U.S. Retail and International segments.

Our method of calculating comparable sales may not be the same as that of other retailers, as methods vary across the retail industry.

THIRD FISCAL QUARTER AND THREE FISCAL QUARTERS ENDED SEPTEMBER 28, 2019 COMPARED TO THIRD FISCAL QUARTER AND THREE FISCAL QUARTERS ENDED SEPTEMBER 29, 2018

Consolidated Net Sales

In the third quarter of fiscal 2019, consolidated net sales increased $19.4 million, or 2.1%, to $943.3 million from $923.9 million in the third quarter of fiscal 2018. For the first three quarters of fiscal 2019, consolidated net sales increased $42.9 million, or 1.8%, to $2.42 billion from $2.38 billion in the first three quarters of fiscal 2018. The increases for the fiscal quarter and year-to-date periods in fiscal 2019 were primarily driven by growth in our U.S. Retail and U.S. Wholesale segments. Changes in foreign currency exchange rates used for translation in the third quarter and first three quarters of fiscal 2019, as compared to the third quarter and first three quarters of fiscal 2018, had an unfavorable effect on our consolidated net sales of approximately $1.3 million and $6.4 million, respectively.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Net sales by segment, and each segment's percentage of consolidated net sales, were as follows:



	Fiscal quarter ended								Three fiscal quarters ended
(dollars in thousands)	September 28, 2019		% of Total		September 29, 2018		% of Total		September 28, 2019		% of Total		September 29, 2018		% of Total
Net sales:
U.S. Retail	$	464,100	49.2	%	$	459,101	49.7	%	$	1,264,283	52.3	%	$	1,244,863	52.4	%
U.S. Wholesale	352,256		37.3	%	338,963		36.7	%	856,713		35.4	%	829,272		34.9	%
International	126,966		13.5	%	125,843		13.6	%	297,768		12.3	%	301,755		12.7	%
Total net sales	$	943,322	100.0	%	$	923,907	100.0	%	$	2,418,764	100.0	%	$	2,375,890	100.0	%

Note: Percentages may not be additive due to rounding.

U.S. Retail Sales

Store Count Data for Company-Operated Retail Stores in our U.S. Retail segment



	Store Count
Region:	September 28, 2019	December 29, 2018
United States	845	844^(*)


(*)	Excludes five temporary Skip Hop stores that were closed in January 2019.

Comparable Net Sales for our U.S. Retail segment

Comparable retail net sales decreased 0.6% during the third quarter and 0.1% during the first three quarters of fiscal 2019 compared to the corresponding periods in fiscal 2018.

Compared to the third quarter of fiscal 2018, we believe comparable retail net sales were negatively affected in the third quarter of fiscal 2019 by reduced overall demand primarily due to persistent warm weather particularly in September 2019, partially offset by increased traffic to our eCommerce website.

Compared to the first three quarters of fiscal 2018, we believe comparable retail net sales were negatively affected in the first three quarters of fiscal 2019 by the liquidation of a competitor in the first fiscal quarter of 2019, weaker demand from international consumers primarily due to the stronger U.S. dollar, and reduced overall demand to our retail stores primarily due to unseasonable temperatures during seasonal transitions, all partially offset by increased traffic to our eCommerce website.

Sales Results

U.S. Retail segment net sales increased approximately $5.0 million, or 1.1%, in the third quarter of fiscal 2019 to $464.1 million from $459.1 million in the third quarter of fiscal 2018. This increase in net sales primarily reflected a/an:


•	Increase of $14.0 million from eCommerce sales, primarily as a result of increased traffic;


•	Increase of $13.3 million from new retail stores that are not yet comparable, and from certain other non-comparable revenues and adjustments to revenue that are related to the Company's new private label credit card program and updated customer loyalty program that were launched in the second quarter of fiscal 2019;


•	Decrease of $15.5 million in comparable retail store sales, primarily as a result of reduced traffic, which we believe was influenced in part by persistent warm weather; and


•	Decrease of $6.8 million due to the effect of store closings.

U.S. Retail segment net sales increased approximately $19.4 million, or 1.6%, in the first three quarters of fiscal 2019 to $1.26 billion from $1.24 billion in the first three quarters of fiscal 2018. This increase in net sales primarily reflected a/an:


•	Increase of $40.5 million from new retail stores that are not yet comparable, and from certain other non-comparable revenues and adjustments to revenue that are related to the Company's new private label credit card program and updated customer loyalty program that were launched in the second quarter of fiscal 2019;


•	Increase of $26.1 million from eCommerce sales, primarily as a result of increased traffic;


•	Decrease of $26.5 million in comparable retail store sales, primarily as a result of reduced traffic, which we believe was a result of unseasonable temperatures during seasonal transitions; and


•	Decrease of $20.7 million due to the effect of store closings.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

U.S. Wholesale Sales

U.S. Wholesale segment net sales increased approximately $13.3 million, or 3.9%, in the third quarter of fiscal 2019 to $352.3 million from $339.0 million in the third quarter of fiscal 2018. This increase reflected a 0.3% increase in the number of units shipped and a 3.7% increase in the average price per unit, primarily due to changes in customer mix.

U.S. Wholesale segment net sales increased approximately $27.4 million, or 3.3%, in the first three quarters of fiscal 2019 to $856.7 million from $829.3 million in the first three quarters of fiscal 2018. This increase reflected a 1.0% increase in the number of units shipped and a 2.2% increase in the average price per unit, primarily due to changes in customer and product mix, partially offset by reduced demand due to customer bankruptcies.

International Sales

Store Count Data for Company-Operated Retail Stores in our International segment



	Store Count
Region:	September 28, 2019	December 29, 2018
Canada	198	188
Mexico	44	42

Comparable Net Sales for our International segment

Canadian comparable retail net sales decreased 1.9% during the third quarter and 2.3% during the first three quarters of fiscal 2019 compared to the corresponding periods in fiscal 2018.

Compared to the third fiscal quarter of 2018, we believe comparable retail net sales were negatively affected in the third fiscal quarter of 2019 by reduced traffic primarily due to persistent warm weather.

Compared to the first three quarters of fiscal 2018, we believe comparable retail net sales were negatively affected in the first three quarters of 2019 by reduced traffic, primarily due to unseasonable temperatures during seasonal transitions.

Sales Results

International segment net sales increased approximately $1.1 million, or 0.9%, in the third quarter of fiscal 2019 to $127.0 million from $125.8 million in the third quarter of fiscal 2018. Changes in foreign currency exchange rates used for translation had an unfavorable effect on International segment net sales of approximately $1.3 million in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018.

The $1.1 million increase in net sales in our International segment primarily reflected a/an:


•	Increase of $1.9 million primarily as a result of an increase in sales to international customers outside of Canada, Mexico, and China, offset by reduced sales to global wholesale accounts in Canada and Mexico;


•	Increase of $1.5 million primarily from our Mexico stores and wholesale business, other than global wholesale accounts ;and


•	Decrease of $2.3 million from sales in China due to transitioning eCommerce and wholesale operations to a full licensing model in the first quarter of fiscal 2019.

International segment net sales decreased approximately $4.0 million, or 1.3%, in the first three quarters of fiscal 2019 to $297.8 million from $301.8 million in the first three quarters of fiscal 2018. Changes in foreign currency exchange rates used for translation had an unfavorable effect on International segment net sales of approximately $6.4 million in the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018.

The $4.0 million decrease in net sales in our International segment primarily reflected a/an:


•	Decrease of $5.8 million from sales in China, primarily due to transitioning eCommerce and wholesale operations to a full licensing model in the first quarter of fiscal 2019;


•	Decrease of $5.4 million primarily from our Canada stores and wholesale business (excluding sales of the Skip Hop brand to wholesale accounts), partially offset by eCommerce sales growth;


•	Increase of $4.0 million primarily as a result of an increase in sales to international customers outside of Canada, Mexico, and China, offset by reduced sales to global wholesale accounts in Canada and Mexico; and

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)


•	Increase of $3.3 million primarily from our Mexico stores and wholesale business, other than global wholesale accounts.

Gross Margin and Gross Profit

Our consolidated gross margin increased from 41.9% in the third quarter of fiscal 2018 to 42.6% in the third quarter of fiscal 2019. Our consolidated gross profit increased $14.8 million, or 3.8%, to $402.2 million in the third quarter of fiscal 2019 from $387.5 million in the third quarter of fiscal 2018. The increase in gross margin was primarily due to higher average price per unit and lower provisions for inventory, partially offset by changes in customer and channel mix, higher shipping costs in our eCommerce channel, and higher product costs including additional tariffs imposed on units imported from China.

Our consolidated gross margin decreased from 43.3% in the first three quarters of fiscal 2018 to 43.0% in the first three quarters of fiscal 2019. Our consolidated gross profit increased $11.2 million, or 1.1%, to $1.04 billion in the first three quarters of fiscal 2019 from $1.03 billion in the first three quarters of fiscal 2018. The decrease in gross margin was primarily due to changes in customer and channel mix, higher shipping costs in our eCommerce channel, and higher product costs including additional tariffs imposed on units imported from China, which were partially offset by higher average price per unit and lower provisions for inventory.

In addition to the cost of product, cost of goods sold includes expenses related to the merchandising, design, and procurement of product. Also included are outbound shipping costs incurred in the eCommerce channel related to delivery of product to the end consumer.

Definitions of gross profit and gross margin vary across the industry and as such, our metrics may not be comparable to other companies.

Royalty Income

Royalty income for the third quarter of fiscal 2019 decreased $1.0 million, or 10.1% to $9.2 million from $10.2 million in the third quarter of fiscal 2018. The decrease was primarily due to the transition of a licensee to a wholesale model, partially offset by an increase in licensee sales.

Royalty income for the first three quarters of fiscal 2019 decreased $1.2 million, or 4.2% to $27.4 million from $28.6 million in the first three quarters of fiscal 2018. The decrease was attributable to the same reasons discussed above.

Selling, General, and Administrative ("SG&A") Expenses

Consolidated SG&A expenses in the third quarter of fiscal 2019 increased $2.6 million, or 0.9%, to $296.7 million from $294.1 million in the third quarter of fiscal 2018. As a percentage of net sales, SG&A expenses decreased from 31.8% in the third quarter of fiscal 2018 to 31.5% in the third quarter of fiscal 2019.

The increase in SG&A expenses in the third quarter of fiscal 2019 primarily reflected a:


•	$5.6 million increase in performance-based compensation;


•	$2.4 million increase in expenses related to the U.S. retail business;


•	$0.5 million increase in information technology investments;


•	$3.4 million decrease in expenses due to the China business model change; and


•	$3.2 million decrease in provisions for accounts receivable.

Consolidated SG&A expenses in the first three quarters of fiscal 2019 decreased $9.1 million, or 1.1%, to $828.5 million from $837.6 million in the first three quarters of fiscal 2018. As a percentage of net sales, SG&A expenses decreased from 35.3% in the first three quarters of fiscal 2018 to 34.3% in the first three quarters of fiscal 2019.

The decrease in SG&A expenses in the first three quarters of fiscal 2019 primarily reflected a/an:


•	$18.0 million decrease in provisions for accounts receivable, primarily attributable to the absence of customer bankruptcy-related charges incurred in the first quarter of fiscal 2018;


•	$8.5 million decrease in expenses due to the China business model change;


•	$3.3 million decrease in marketing expenses;


•	$7.0 million increase in expenses related to the U.S. retail business;


•	$6.5 million increase in performance-based compensation;


•	$3.9 million increase in distribution costs;


•	$2.0 million increase in information technology investments; and

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)


•	$1.6 million in severance associated with an organizational restructuring.

Intangible Asset Impairment

In the third quarter, the Company recorded a non-cash charge of $30.8 million relative to the impairment of its Skip Hop tradename recorded in connection with the acquisition of Skip Hop Holdings, Inc. in 2017. The impairment reflects the effect of lower sales and profitability relative to the assumptions supporting the valuation of the tradename at acquisition. Such reductions reflect lower U.S. demand, including the loss of a significant customer (Toys “R” Us), lower international demand and the impact of tariffs imposed on product sourced from China. In prior assessments of the Skip Hop tradename, we believed we would recover the lost sales to Toys “R” Us with sales to other retailers. To date, that recovery has not been realized.

Operating Income

Consolidated operating income decreased $19.7 million, or 19.0%, to $83.9 million in the third quarter of fiscal 2019 from $103.6 million in the third quarter of fiscal 2018. Consolidated operating income decreased $11.7 million, or 5.3%, to $209.1 million in the first three quarters of fiscal 2019 from $220.8 million in the first three quarters of fiscal 2018.

Consolidated operating margin decreased from 11.2% in the third quarter of fiscal 2018 to 8.9% in the third quarter of fiscal 2019. Consolidated operating margin decreased from 9.3% in the first three quarters of fiscal 2018 to 8.6% in the first three quarters of fiscal 2019.

The table below summarizes the changes in each of our segment's operating results and unallocated corporate expenses between the fiscal periods indicated:



(dollars in thousands)	U.S. Retail			U.S. Wholesale			International			Unallocated Corporate Expenses			Consolidated
Operating income (loss) for the third quarter of fiscal 2018	$	47,139		$	67,785		$	12,434		$	(23,801	)	$	103,557
Favorable (unfavorable) change in the third quarter of fiscal 2019
Gross profit	6,110			5,677			2,843			131			14,761
Royalty income	630			(1,852		)	190			—			(1,032		)
SG&A expenses	(3,175		)	1,877			1,141			(2,459		)	(2,616		)
Intangible asset impairment	(1,232		)	(19,096		)	(10,472		)	—			(30,800		)
Operating income (loss) for the third quarter of fiscal 2019	$	49,472		$	54,391		$	6,136		$	(26,129	)	$	83,870



(dollars in thousands)	U.S. Retail			U.S. Wholesale			International			Unallocated Corporate Expenses			Consolidated
Operating income (loss) for the first three quarters of fiscal 2018	$	122,086		$	148,395		$	20,508		$	(70,152	)	$	220,837
Favorable (unfavorable) change in the first three quarters of fiscal 2019
Gross profit	10,350			1,373			(1,111		)	577			11,189
Royalty income	1,063			(2,642		)	377			—			(1,202		)
SG&A expenses	(7,700		)	17,151			6,049			(6,419		)	9,081
Intangible asset impairment	(1,232		)	(19,096		)	(10,472		)	—			(30,800		)
Operating income (loss) for the first three quarters of fiscal 2019	$	124,567		$	145,181		$	15,351		$	(75,994	)	$	209,105

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

The following table presents changes in the operating margin for each of our three operating segments expressed in basis points ("bps") relative to net sales between the fiscal periods indicated.



	U.S. Retail		U.S. Wholesale		International
Operating margin for the third quarter of fiscal 2018	10.3	%	20.0	%	9.9	%
Favorable (unfavorable) bps change in the third quarter of fiscal 2019
Gross profit	80 bps		50 bps		180 bps
Royalty income	10 bps		(60) bps		10 bps
SG&A expenses	(20) bps		90 bps		120 bps
Intangible asset impairment	(30) bps		(540) bps		(820) bps
Operating margin for the third quarter of fiscal 2019	10.7	%	15.4	%	4.8	%



	U.S. Retail		U.S. Wholesale		International
Operating margin for the first three quarters of fiscal 2018	9.8	%	17.9	%	6.8	%
Favorable (unfavorable) bps change in the first three quarters of fiscal 2019
Gross profit	—		(80) bps		20 bps
Royalty income	10 bps		(40) bps		10 bps
SG&A expenses	10 bps		240 bps		150 bps
Intangible asset impairment	(10) bps		(220) bps		(340) bps
Operating margin for the first three quarters of fiscal 2019	9.9	%	16.9	%	5.2	%

U.S. Retail Operating Income

U.S. Retail segment operating income increased by $2.3 million, or 4.9%, to $49.5 million in the third quarter of fiscal 2019 from $47.1 million in the third quarter of fiscal 2018. This segment's operating margin increased 40 bps from 10.3% in the third quarter of fiscal 2018 to 10.7% in the third quarter of fiscal 2019. The primary drivers of the change in operating margin were a/an:


•	80 bps increase in gross profit, primarily due higher average price per unit, partially offset by higher product costs and eCommerce shipping costs;


•	10 bps increase in royalty income, primarily due to increased licensee sales;


•	20 bps increase in SG&A expenses, primarily due to a:


•	30 bps increase in expenses related to eCommerce growth;


•	30 bps increase in performance-based compensation;


•	10 bps increase in marketing investments;


•	40 bps decrease in distribution and freight costs; and


•	30 bps decrease due to intangible asset impairment.

U.S. Retail segment operating income increased by $2.5 million, or 2.0%, to $124.6 million in the first three quarters of fiscal 2019 from $122.1 million in the first three quarters of fiscal 2018. This segment's operating margin increased 10 bps from 9.8% in the first three quarters of fiscal 2018 to 9.9% in the first three quarters of fiscal 2019. The primary drivers of the change in operating margin were:


•	comparable period over period gross profit relative to net sales as the benefit from higher average price per unit and lower provisions for inventory were offset by higher product costs and eCommerce shipping costs;


•	a 10 bps increase in royalty income, primarily due to increased licensee sales;


•	a 10 bps decrease in SG&A expenses, primarily due to a:


•	20 bps decrease in marketing investments;


•	20 bps decrease in expenses associated with retail stores;


•	20 bps increase in expenses related to eCommerce growth;


•	10 bps increase in performance-based compensation; and


•	10 bps decrease due to intangible asset impairment.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

U.S. Wholesale Operating Income

U.S. Wholesale segment operating income in the third quarter of fiscal 2019 decreased $13.4 million, or 19.8%, to $54.4 million from $67.8 million in the third quarter of fiscal 2018. The segment's operating margin decreased 460 bps from 20.0% in the third quarter of fiscal 2018 to 15.4% in the third quarter of fiscal 2019. The primary drivers of the change in operating margin were a:


•	50 bps increase in gross profit, primarily due to lower provisions for inventory, partially offset by changes in customer mix;


•	60 bps decrease in royalty income, primarily due to the transition of a licensee to a wholesale model;


•	90 bps decrease in SG&A expenses, primarily due to a decrease in provisions for accounts receivable; and


•	540 bps decrease due to intangible asset impairment.

U.S. Wholesale segment operating income in the first three quarters of fiscal 2019 decreased $3.2 million, or 2.2%, to $145.2 million from $148.4 million in the first three quarters of fiscal 2018. The segment's operating margin decreased 100 bps from 17.9% in the first three quarters of fiscal 2018 to 16.9% in the first three quarters of fiscal 2019. The primary drivers of the change in operating margin were a/an:


•	80 bps decrease in gross profit, primarily due to changes in customer mix, partially offset by lower provisions for inventory;


•	40 bps decrease in royalty income, primarily due to the transition of a licensee to a wholesale model;


•	240 bps decrease in SG&A expenses, primarily due to the absence of a provision for a customer bankruptcy that occurred in the first fiscal quarter of 2018; and


•	220 bps decrease due to intangible asset impairment.

International Operating Income

International segment operating income decreased by $6.3 million, or 50.7%, to $6.1 million in the third quarter of fiscal 2019 from $12.4 million in the third quarter of fiscal 2018. This segment's operating margin decreased 510 bps from 9.9% in the third quarter of fiscal 2018 to 4.8% in the third quarter of fiscal 2019. The primary drivers of the change in operating margin were a/an:


•	180 bps increase in gross profit primarily due to lower provisions for inventory, partially offset by channel mix and higher product costs;


•	120 bps decrease in SG&A expenses, primarily due to the China business model change; and


•	820 bps decrease due to intangible asset impairment.

International segment operating income decreased by $5.2 million, or 25.1%, to $15.4 million in the first three quarters of fiscal 2019 from $20.5 million in the first three quarters of fiscal 2018. This segment's operating margin decreased 160 bps from 6.8% in the first three quarters of fiscal 2018 to 5.2% in the first three quarters of fiscal 2019. The primary drivers of the change in operating margin were a/an:


•	20 bps increase in gross profit primarily due to lower provisions for inventory and the benefit from the favorable recovery of value of China-related inventories in the first quarter of fiscal 2019, partially offset by higher product costs and increased promotional activity for sales to customers across various regions and channel mix;


•	150 bps decrease in SG&A expenses, primarily due to the China business model change; and


•	340 bps decrease due to intangible asset impairment.

Unallocated Corporate Expenses

Unallocated corporate expenses increased by $2.3 million, or 9.8%, in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018. Unallocated corporate expenses, as a percentage of consolidated net sales, increased from 2.6% in the third quarter of fiscal 2018 to 2.8% in the third quarter of fiscal 2019.

Unallocated corporate expenses increased by $5.8 million, or 8.3%, in the first three quarters of fiscal 2019 compared to the first three quarters of fiscal 2018. Unallocated corporate expenses, as a percentage of consolidated net sales, increased from 3.0% in the first three quarters of fiscal 2018 to 3.1% in the first three quarters of fiscal 2019.

The increase in the third quarter of fiscal 2019 was primarily due to an increase in performance-based compensation. The increase in the first three quarters of fiscal 2019 primarily reflects the receipt of insurance recoveries that occurred in the second quarter of fiscal 2018 that did not reoccur in fiscal 2019, and an increase in performance-based compensation.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Interest Expense

Interest expense in the third quarter of fiscal 2019 and 2018 was $10.0 million and $9.9 million, respectively. Weighted-average borrowings for the third quarter of fiscal 2019 were approximately $735.2 million with an effective interest rate of 5.34%, compared to weighted-average borrowings for the third quarter of fiscal 2018 of $782.4 million with an effective interest rate of 4.72%. The decrease in weighted-average borrowings during the third quarter of fiscal 2019 was attributable to reduced borrowings under our secured revolving credit facility.

Interest expense in the first three quarters of fiscal 2019 and 2018 was $28.7 million and $25.8 million, respectively. Weighted-average borrowings for the first three quarters of fiscal 2019 were approximately $661.2 million with an effective interest rate of 5.45%, compared to weighted-average borrowings for the first three quarters of fiscal 2018 of $684.1 million with an effective interest rate of 4.85%. The decrease in weighted-average borrowings during the first three quarters of fiscal 2019 was attributable to reduced borrowings under our secured revolving credit facility.

The increase in the weighted-average interest rate for the third quarter and first three quarters of fiscal 2019 compared to the third quarter and first three quarters of fiscal 2018 was primarily due to incremental interest expense associated with the refinancing of the senior notes in the first quarter of fiscal 2019 and a higher LIBOR rate for the outstanding variable-rate borrowings on our secured revolving credit facility during the 2019 period.

On our consolidated balance sheet, unamortized debt issuance costs associated with our senior notes are presented as a direct reduction in the carrying value of the associated debt liability for all periods presented. See Note 8, Long-term Debt.

Other Expense (Income), Net

Other expense (income), net is comprised primarily of gains and losses on foreign currency transactions and, if utilized during a reporting period, gains and losses on foreign currency forward contracts.

Loss on Extinguishment of Debt

During the first quarter of fiscal 2019, loss on extinguishment of debt was $7.8 million due to the early extinguishment of $400 million in aggregate principal amount, 5.25% senior notes due 2021. Concurrently, we issued $500 million in aggregate principal amount, 5.625% senior notes due 2027, allowing us to extend our maturity schedule.

Income Taxes

Our consolidated effective income tax rate for the third quarter of fiscal 2019 was 18.2% compared to 23.5% for the third quarter of fiscal 2018. Our consolidated effective income tax rate for the first three quarters of fiscal 2019 was 19.9% compared to 22.3% for the first three quarters of fiscal 2018. The lower effective rate in fiscal 2019 reflects the benefits of clarification of the tax provisions enacted under the 2017 U.S. tax reform legislation and changes in foreign operations.

Net Income

Our consolidated net income for the third quarter of fiscal 2019 decreased by $11.5 million, or 16.0%, to $60.3 million compared to $71.8 million in the third quarter of fiscal 2018. Our consolidated net income for the first three quarters of fiscal 2019 decreased by $12.9 million, or 8.5%, to $138.7 million compared to $151.5 million in the first three quarters of fiscal 2018. These changes were due to the factors previously discussed.

FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY

Our ongoing cash needs are primarily for working capital and capital expenditures. We expect that our primary sources of liquidity will continue to be cash and cash equivalents on hand, cash flow from operations, and borrowings available under our secured revolving credit facility. We expect that these sources and access to capital markets will fund our ongoing requirements for the foreseeable future. Further, we do not expect current economic conditions to prevent us from meeting our cash requirements. These sources of liquidity may be affected by events described in our risk factors, as further discussed under the heading "Risk Factors" in our most recently filed Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission from time to time.

As of September 28, 2019, the Company had $153.9 million of cash and cash equivalents in major financial institutions, including $45.7 million in financial institutions located outside of the United States. We maintain cash deposits with major financial institutions that exceed the insurance coverage limits provided by the Federal Deposit Insurance Corporation in the United States and by similar insurers for deposits located outside the United States. To mitigate this risk, we utilize a policy of allocating cash deposits among major financial institutions that have been evaluated by us and third-party rating agencies.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Balance Sheet

Net accounts receivable at September 28, 2019 were $293.2 million compared to $293.5 million at September 29, 2018 and $258.3 million at December 29, 2018. The overall decrease of $0.3 million, or 0.1%, at September 28, 2019 compared to September 29, 2018 was primarily a result of the timing of customer payments, partially offset by increased wholesale demand. Due to the seasonal nature of our operations, the net accounts receivable balance at September 28, 2019 is not comparable to the net accounts receivable balance at December 29, 2018.

Inventories at September 28, 2019 were $723.2 million compared to $693.0 million at September 29, 2018 and $574.2 million at December 29, 2018. The increase of $30.2 million, or 4.4%, at September 28, 2019 compared to September 29, 2018 primarily reflects increased wholesale demand and new retail stores, higher product costs, and lower provisions for inventory. Due to the seasonal nature of our operations, the inventories balance at September 28, 2019 is not comparable to the inventories balance at December 29, 2018.

Cash Flow

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the first three quarters of fiscal 2019 was $73.4 million compared to net cash provided by operating activities of $21.4 million in the first three quarters of fiscal 2018. Our cash flow provided by operating activities is dependent on net income and changes in our working capital. The increase in operating cash flow for the 2019 period was primarily due to favorable timing of payments by customers.

Net Cash Used in Investing Activities

Net cash used in investing activities was $45.4 million for the first three quarters of fiscal 2019 compared to $47.4 million in the first three quarters of fiscal 2018. Capital expenditures were $46.1 million in the first three quarters of fiscal 2019 compared to $47.8 million in the first three quarters of fiscal 2018, reflecting timing of new store openings in the 2018 fiscal period. Capital spending in the first three quarters of fiscal 2019 included approximately $29.9 million for our U.S. and international retail store openings and re-modelings, $6.6 million for information technology initiatives, $6.3 million for distribution and office facilities, and $2.0 million for wholesale fixtures.

We plan to invest approximately $75 million in total capital expenditures for all of fiscal 2019, primarily for our U.S. and international retail store openings and re-modelings, information technology initiatives, and distribution facilities.

Net Cash Used in Financing Activities

Net cash used in financing activities was $44.4 million in the first three quarters of fiscal 2019 compared to $27.5 million in the first three quarters of fiscal 2018. The net increase in cash used in financing activities in the 2019 period primarily reflected the redemption of $400 million in principal amount of senior notes, the premium paid on the early extinguishment of the $400 million senior notes, a decrease in borrowings on the revolving credit facility, increased repurchases of common stock, and increased dividend payments, partially offset by the issuance of $500 million in principal amount of senior notes in March 2019.

Secured Revolving Credit Facility

As of September 28, 2019, we had $275.0 million in outstanding borrowings under our secured revolving credit facility, exclusive of $5.0 million of outstanding letters of credit. As of September 28, 2019, approximately $470.0 million was available for future borrowing. All outstanding borrowings under our secured revolving credit facility are classified as non-current liabilities on our consolidated balance sheet because of the contractual repayment terms under the credit facility. However, these repayment terms also allow us to repay some or all of the outstanding borrowings at any time.

The interest rate margins applicable to our secured revolving credit facility as of September 28, 2019 were 1.375% for LIBOR rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 1.125% to 1.875%) and 0.375% for base rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 0.125% to 0.875%).

As of September 28, 2019, we were in compliance with the financial and other covenants under our secured revolving credit facility.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Senior Notes

On March 14, 2019, TWCC redeemed $400 million principal amount of senior notes, bearing interest at a rate of 5.25% per annum, and maturing on August 15, 2021, pursuant to the optional redemption provisions of the notes, which required that TWCC pay the outstanding principal plus accrued interest and an early redemption premium of 1.31% of the outstanding principal amounts of the senior notes. This debt redemption resulted in a loss on extinguishment of debt of $7.8 million, consisting of $5.2 million of early redemption premiums and $2.6 million of unamortized debt issuance costs.

Concurrently, TWCC issued $500 million principal amount of senior notes at par, bearing interest at a rate of 5.625% per annum, and maturing on March 15, 2027, all of which were outstanding as of September 28, 2019. TWCC received net proceeds from the offering of the senior notes of approximately $494.8 million, after deducting the underwriting fees and other expenses, which TWCC used to redeem the senior notes discussed above and repay borrowings under the secured revolving credit facility. During the first three quarters of fiscal 2019, approximately $5.8 million, including both bank fees and other third party expenses, has been capitalized in connection with the issuance and is being amortized over the term of the senior notes.

Share Repurchases

In the first three quarters of fiscal 2019, the Company repurchased and retired 1,607,920 shares in open market transactions for approximately $147.5 million at an average price of $91.71 per share. In the first three quarters of fiscal 2018, the Company repurchased and retired 1,364,420 shares in open market transactions for approximately $145.5 million, at an average price of $106.63 per share.

The total remaining capacity under all remaining repurchase authorizations as of September 28, 2019 was approximately $245.1 million. Future repurchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity being at management's discretion depending on market conditions, share price, other investment priorities, and other factors. The share repurchase authorizations have no expiration date.

Dividends

In the first, second, and third quarters of fiscal 2019, we paid quarterly cash dividends of $0.50 per share in each quarter. In the first, second, and third quarters of fiscal 2018, we paid quarterly cash dividends of $0.45 per share in each quarter. Future declarations of quarterly dividends and the establishment of future record and payment dates are at the discretion of our Board of Directors and will be based on a number of factors, including our future financial performance and other investment priorities.

As disclosed in our most recent Annual Report on Form 10-K for the 2018 fiscal year ended December 29, 2018, provisions in our secured revolving credit facility could have the effect of restricting our ability to pay future cash dividends on or make future repurchases of our common stock.

SEASONALITY

We experience seasonal fluctuations in our sales and profitability due to the timing of certain holidays and key retail shopping periods, which generally has resulted in lower sales and gross profit in the first half of our fiscal year versus the second half of the fiscal year. Accordingly, our results of operations during the first half of the year may not be indicative of the results we expect for the full year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

Our critical accounting policies and estimates are described under the heading "Critical Accounting Policies and Estimates" in Item 7 of our most recent Annual Report on Form 10-K for the 2018 fiscal year ended December 29, 2018. Our critical accounting policies and estimates are those policies that require management's most difficult and subjective judgments and may result in the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

estimates include: revenue recognition and accounts receivable allowance, inventory, goodwill and tradename, accrued expenses, loss contingencies, accounting for income taxes, foreign currency, employee benefit plans, and stock-based compensation arrangements. There have been no material changes in these critical accounting policies and estimates from those described in our most recent Annual Report on Form 10-K, except for the effects that the adoption of ASC 842, Leases, had on our policies as disclosed under the header "Accounting Policies" in Note 2, Basis of Presentation, to the accompanying unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.

Additionally, information related to the pending adoption of recently issued accounting standards is provided in Note 16, Pending Adoption of Recent Accounting Pronouncements, to the accompanying unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency and Interest Rate Risks

In the operation of our business, we have market risk exposures including those related to foreign currency and interest rates. We employ various strategies to attempt to minimize our exposure to these risks.

Currency Risk

We contract for production with third parties, primarily in Asia. While these contracts are stated in U.S. dollars, there can be no assurance that the cost for the future production of our products will not be affected by exchange rate fluctuations between the U.S. dollar and the local currencies of these contractors. We cannot predict the impact that future currency fluctuations may have on our financial position, results of operations, or cash flows in future periods.

The financial statements of our foreign subsidiaries that are denominated in functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in accumulated other comprehensive income (loss).

Fluctuations in currency exchange rates, primarily between the U.S. dollar and the currencies of Canada, Mexico, Hong Kong, and the United Kingdom, may affect our results of operations, financial position, and cash flows. Transactions by certain foreign subsidiaries may be denominated in currencies other than that entity's functional currency. Foreign currency transaction gains and losses also include the impact of non-current intercompany loans with foreign subsidiaries that are marked to market. In our statement of operations, these gains and losses are recorded within Other income/expense, net.

As part of our overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, some of our foreign operations may use currency forward contracts from time to time to hedge the foreign currency exchange risk associated with purchases that are made in U.S. dollars, primarily for inventory purchases. As part of this strategy, we primarily use foreign currency forward exchange contracts that have maturities of less than 12 months to provide continuing coverage throughout the hedging period. As of September 28, 2019, there were no open foreign currency forward exchange contracts.

Interest Rate Risk

Our operating results are subject to risk from interest rate fluctuations on our secured revolving credit facility, which carries variable interest rates. Our variable rate borrowings outstanding as of September 28, 2019 were $275.0 million. An increase or decrease of 1% in the effective interest rate on that amount would increase or decrease our annual pre-tax interest expense by approximately $2.8 million.

Other Risks

We enter into various purchase order commitments with our suppliers. We generally can cancel these arrangements, although in some instances we may be subject to a termination charge reflecting a percentage of work performed prior to cancellation.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of September 28, 2019.

Changes in Internal Control over Financial Reporting

The principal executive officer and principal financial officer also conducted an evaluation of the Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the fiscal quarter ended September 28, 2019 that have materially affected, or which are reasonably likely to materially affect, Internal Control.

There were no changes in the Company’s Internal Control that materially affected, or were likely to materially affect, such control over financial reporting during the fiscal quarter ended September 28, 2019.

PART II

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to various claims and pending or threatened lawsuits in the normal course of our business. The Company is not currently a party to any legal proceedings that it believes would have a material adverse effect on its financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors described in our Form 10-K for the 2018 fiscal year ended December 29, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share Repurchases

The following table provides information about share repurchases during the third quarter of fiscal 2019:



Period	Total number of shares purchased⁽¹⁾	Average price paid per share	Total number of shares purchased as part of publicly announced plans or programs⁽²⁾	Approximate dollar value of shares that may yet be purchased under the plans or programs⁽³⁾
June 30, 2019 through July 27, 2019	183,541	$93.08	183,541	$283,086,061

July 28, 2019 through August 24, 2019	198,154	$89.47	197,141	$265,447,449

August 25, 2019 through September 28, 2019	221,361	$91.70	221,361	$245,148,670

Total	603,056		602,043


(1)	Includes shares of our common stock surrendered by our employees to satisfy required tax withholding upon the vesting of restricted stock awards. There were 1,013 shares surrendered between July 28, 2019 and August 24, 2019.


(2)	Share purchases during the third quarter of fiscal 2019 were made in compliance with all applicable rules and regulations and in accordance with the share repurchase authorizations described in Note 7, Common Stock, to our accompanying unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.


(3)	Under share repurchase authorizations approved by our Board of Directors.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

N/A

ITEM 4. MINE SAFETY DISCLOSURES

N/A

ITEM 5. OTHER INFORMATION

N/A

ITEM 6. EXHIBITS



Exhibit Number	Description of Exhibits



3.1	Certificate of Incorporation of Carter's, Inc., as amended on May 22, 2017 (incorporated by reference to Exhibit 3.1 of Carter's, Inc.'s Current Report on Form 8-K filed on May 23, 2017).
3.2	Amended and Restated By-Laws of Carter's, Inc. (incorporated by reference to Exhibit 3.2 of Carter's, Inc.'s Current Report on Form 8-K filed on May 23, 2017).
31.1	Rule 13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f) Certification.
31.2	Rule 13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f) Certification.
32	Section 1350 Certification.
101	Interactive Data File.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.

CARTER’S, INC.



October 24, 2019	/s/ MICHAEL D. CASEY
	Michael D. Casey
	Chief Executive Officer
	(Principal Executive Officer)



October 24, 2019	/s/ RICHARD F. WESTENBERGER
	Richard F. Westenberger
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)