CRI US Equity☆

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our results of operations and current financial condition. You should read this discussion in conjunction with our consolidated historical financial statements and notes included elsewhere in this Annual Report on Form 10-K. Our discussion of our results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products and services, and our future results. We based these statements on assumptions that we consider reasonable. Actual results may differ materially from those suggested by our forward-looking statements for various reasons including those discussed under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Those risk factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. Except for any ongoing obligations to disclose material information as required by the federal securities laws, we do not have any intention or obligation to update forward-looking statements after we file this Annual Report on Form 10-K.

For a comparison of our results for fiscal year 2019 to our results for fiscal year 2018 and other financial information related to fiscal year 2018, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Annual Report on Form 10-K, filed with the SEC on February 24, 2020.

Fiscal Years

Our fiscal year ends on the Saturday in December or January nearest December 31. Every five or six years, our fiscal year includes an additional, or 53rd, week of results. Fiscal year 2020 which ended on January 2, 2021, contained 53 calendar weeks. Fiscal year 2019 and 2018 which ended on December 28, 2019 and December 29, 2018, respectively, each contained 52 calendar weeks.

The 53rd week in fiscal 2020 contributed approximately $32.1 million of incremental consolidated revenue. Certain expenses increased in relationship to the additional revenue from the 53rd week, while other expenses, such as fixed costs and expenses incurred on a calendar-month basis, did not increase. The consolidated gross margin for the additional revenue from the 53rd week is slightly lower than the consolidated gross margin for fiscal 2020 due to increased promotional activity during the 53rd week.

Our Business

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 and accessories for children in sizes newborn to 14.

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

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

Our mission is to serve the needs of all families with young children, with a vision to be the world’s favorite brands in young children’s apparel and products. We believe our brands provide a complementary product offering and aesthetic, are each uniquely positioned in the marketplace, and offer strong value to families with young children. The baby and young children's apparel market ages zero to 10 in the U.S. is approximately $24 billion. In that market, our Carter’s brands, including our exclusive brands, have the #1 position with approximately 12% market share and our OshKosh brand has approximately 1% market share.

Our multi-channel, global business model, which includes retail stores, eCommerce, and wholesale sales channels, as well as omni-channel capabilities in the United States, enables us to reach a broad range of consumers around the world. At the end of fiscal 2020, our channels included 1,101 retail stores, approximately 19,800 wholesale locations, and eCommerce websites in North America, as well as our international wholesale accounts and licensees who operate in over 90 countries.

We have extensive experience in the young children’s apparel and accessories market and focus on delivering products that satisfy our consumers’ needs. Our long-term growth strategy focuses on:

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•providing the best value and experience in apparel and related products for young children;

•extending the reach of our brands; and

•improving profitability.

During fiscal 2020, the global pandemic caused by the spread of the novel strain of coronavirus (“COVID-19”) negatively affected the global economy, disrupted global supply chains, and created significant disruption of the financial and retail markets, including a disruption in consumer demand for baby and children’s clothing and accessories. For more information on the effects the pandemic had on the Company, and our response to the pandemic, see “Recent Developments.”

Segments

Our three business segments are: U.S. Retail, U.S. Wholesale, and International. These segments are our operating and reporting segments. Our U.S. Retail segment consists of revenue primarily from sales of products in the United States through our retail stores and eCommerce websites. Similarly, our U.S. Wholesale segment consists of revenue primarily from sales in the United States of products to our wholesale partners. Finally, our International segment consists of revenue primarily from sales of products outside the United States, largely through our retail stores and eCommerce websites in Canada and Mexico, and sales to our international wholesale customers and licensees. Additional financial and geographical information about our segments is contained in Item 8 “Financial Statements and Supplementary Data” under Note 14, Segment Information, to the consolidated financial statements.

Recent Developments

In December 2019, an outbreak of COVID-19 began in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a pandemic and former President Trump declared a national emergency. Federal, state and local governments and private entities mandated various restrictions, including travel restrictions as new waves of the pandemic and new strains of the virus spread across the globe, restrictions on public gatherings, stay at home orders and advisories, and quarantining of people who may have been exposed to the virus. The response to the COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created significant disruption of the financial and retail markets, including a disruption in consumer demand for baby and young children’s clothing and accessories.

The COVID-19 pandemic has had, and will likely continue to have, significant adverse effects on our business, financial condition, and results of operations. During fiscal 2020, the impacts of the COVID-19 pandemic included:

•We have seen lower sales both in our retail and wholesale channels, and some of our wholesale customers have unilaterally extended their payment terms with us.

•During March and April 2020, for the safety of customers and employees, we suspended retail store operations in North America, which had a material effect on the results of operations in our U.S. Retail segment. Stores began reopening in the second quarter of fiscal 2020. During December 2020, we closed a number of our stores again in Canada and Mexico for the safety of our employees and customers, and to comply with local regulation. As of January 2, 2021, there were approximately 133 stores closed in Canada, and we estimate most will remain closed until the middle of the first quarter of fiscal 2021. As of January 2, 2021, we had 940 stores out of 1,101 stores open in North America; stores were opened subject to safety considerations resulting from the progression of the pandemic and related laws and regulations put in place by state and local governments.

•As consumer preferences shifted to our eCommerce channel, we announced our plan to close approximately 25% of our current stores, when leases come up for renewal or where there is a kick-out provision in the lease. Over 100 of these closures are planned by the end of fiscal 2021.

•To improve near-term liquidity in light of the uncertainty and disruption related to COVID-19:

◦in March 2020, we drew $639.0 million under our secured revolving credit facility;

◦on May 4, 2020, through our wholly owned subsidiary, The William Carter Company (“TWCC”), we successfully amended our revolving credit facility to provide for, among other things, a waiver of financial covenants through the balance of fiscal year 2020, revised covenant requirements through the third quarter of fiscal year 2021, and the ability to raise additional unsecured financing; and

◦on May 11, 2020, we completed the sale of $500 million principal amount of senior notes at par issued by TWCC, bearing interest at a rate of 5.500% per annum, and maturing on May 15, 2025.

•During the second and third quarters of fiscal 2020, we used the net proceeds from the notes, along with cash on hand, to repay all of our outstanding borrowings under our secured revolving credit facility. As of January 2, 2021, we had

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no outstanding borrowings under our secured revolving credit facility, exclusive of $5.0 million of outstanding letters of credit, and we had approximately $1.85 billion in total liquidity, including $1.10 billion cash on hand and $745.0 million available for future borrowing under our secured revolving credit facility.

•Additionally, to create additional financial flexibility, we reduced costs, inventory commitments, and capital expenditures, during a portion of fiscal 2020. For example:

◦We furloughed all of our U.S. and Canada store associates and certain office-based employees during a portion of the time that our stores were closed. In addition, in the first and fourth quarters of fiscal 2020, the Company announced several organizational restructuring initiatives which included a reorganization of staffing models across multiple functions to drive labor savings and increase efficiencies, the consolidation of certain functions into our corporate headquarters in Atlanta, Georgia, and over 100 planned store closures by the end of fiscal 2021.

◦We implemented temporary tiered salary and Board of Directors' fee reductions and reduced other compensation-related expenses. During the third quarter of fiscal 2020, we reinstated salaries and Board of Directors’ fees.

◦During the second quarter of fiscal 2020, the Company suspended rent payments under the leases for our temporarily closed stores in North America. The Company resumed making the required rent payments under these leases in the third quarter of fiscal 2020.

◦In the first half of fiscal 2020, we announced that we suspended our share repurchase program and our quarterly cash dividend.

◦We also executed substantial reductions in expenses, store occupancy costs, and overall costs, including through reduced inventory purchases. During the third quarter of fiscal 2020, we resumed our strategic investments in information technology, eCommerce, marketing, and omni-channel retail store initiatives.

•Our manufacturing supply chain, which is primarily in Asia, was disrupted due to delays in textile mill and factory openings, delays in workers being able to return to work, and the spread of the pandemic from China to other parts of the world. In addition, ocean and air freight carriers’ global operations have been disrupted due to the global shift in demand, leading to delays in shipments and increased costs from Asia to North America and elsewhere.

We cannot estimate with certainty the length or severity of this pandemic, or the extent to which the disruption may materially impact our consolidated financial position, consolidated results of operations, and consolidated cash flows. Refer to risks set forth in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Fiscal Year 2020 Highlights

•Consolidated net sales decreased $495.0 million, or 14.1%, to $3.02 billion in fiscal 2020.

◦The temporary closure of our retail stores, particularly during the months of March, April, May, and for many stores in Canada and Mexico, in December, and a decrease in sales to certain of our wholesale customers as a result of disruptions related to the COVID-19 pandemic, negatively affected our financial results in fiscal 2020.

◦Our eCommerce operations delivered strong growth in fiscal 2020, reflecting higher online demand, enhanced marketing efforts, the relaunch of our enhanced websites in the second half of fiscal 2019, and the launch of our website in Mexico in late fiscal 2019.

◦We continue to see good growth with our exclusive brands; U.S. sales of exclusive brands to our top three wholesale customers grew 12.5%.

◦We also delivered growth in our omni-channel programs during fiscal 2020 due to increased investments and enhancements, including expanding our curbside pickup program and direct-from-store shipment program.

◦The 53rd week in fiscal 2020 contributed approximately $32.1 million in additional consolidated net sales.

•Gross profit decreased $195.1 million, or 12.9%, to $1.31 billion in fiscal 2020. Gross margin increased 50 basis points (“bps”) to 43.4% in fiscal 2020, primarily due to an increase in eCommerce average selling prices as a result of decreased promotions, as well as decreased product costs, partially offset by the recognition of adverse inventory and fabric purchase commitments from disruptions related to the COVID-19 pandemic, increased inventory provisions, and increased inventory-related handling costs. The Company recorded adverse inventory and fabric purchase commitments of $14.7 million and incremental excess inventory reserve related charges of $4.9 million in fiscal 2020, primarily due to disruptions related to the COVID-19 pandemic.

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•Selling, general and administrative (“SG&A”) expenses as a percentage of total net sales (“SG&A rate”) increased 420 bps to 36.6% for fiscal 2020. The increase in the SG&A rate was primarily driven by lower net sales as a result of business disruptions related to the COVID-19 pandemic, increased eCommerce distribution and fulfillment costs due to an increase in eCommerce demand, deleverage of retail store expenses, incremental COVID-19 related charges, organizational restructuring charges, impairment charges on operating lease assets, and increased bad debt expense, all partially offset by decreased marketing costs and other reductions in spending.

◦COVID-19 related SG&A expenses in fiscal 2020 were $21.4 million, which primarily included incremental costs of $12.1 million related to payroll continuation for a period of time for our retail employees and increased employee-related costs at our distribution centers, costs associated with additional protective equipment and cleaning supplies of $8.9 million, and restructuring costs of $2.3 million, partially offset by payroll tax benefits of $3.5 million.

•Operating income decreased $182.0 million, or 48.9%, to $189.9 million in fiscal 2020, primarily due to the factors discussed above and the recognition of a $17.7 million non-cash goodwill impairment charge to the Other International reporting unit, a $15.5 million non-cash impairment charge related to the OshKosh tradename, and an $11.0 million non-cash impairment charge related to the Skip Hop tradename in fiscal 2020, partially offset by the recognition of a $30.8 million non-cash impairment related to the Skip Hop tradename in fiscal 2019 that did not re-occur in fiscal 2020.

•Net income decreased $154.1 million, or 58.4%, to $109.7 million in fiscal 2020, primarily due to the factors discussed above and an increase in interest expense due to an increase in weighted-average borrowings during fiscal 2020, partially offset by a $7.8 million loss on extinguishment of debt recognized as part of our senior note refinancing in fiscal 2019 that did not re-occur in fiscal 2020.

•Diluted net income per common share decreased 57.3% to $2.50 in fiscal 2020.

•A total of $71.5 million was returned to our shareholders in fiscal 2020, comprised of $45.3 million in share repurchases and $26.3 million in dividends.

•The impacts of the COVID-19 pandemic adversely affected our fiscal 2020 results. However, we were able to improve on our gross and operating margins throughout the second half of fiscal 2020 with strong inventory management, continued progress in improving price realization, a better promotion strategy, and our ability to manage costs in response to decreased sales.

◦Inventory increased 0.9%, compared to December 28, 2019, driven by strong inventory management and sell through of excess inventory.

•Operating cash flow increased 52.3%, compared to fiscal 2019, primarily due to an extension of vendor payment terms and deferrals of retail store lease payments.

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RESULTS OF OPERATIONS

2020 FISCAL YEAR ENDED JANUARY 2, 2021 (53 WEEKS) COMPARED TO 2019 FISCAL YEAR ENDED DECEMBER 28, 2019 (52 WEEKS)

The following table summarizes our results of operations. All percentages shown in the below table and the discussion that follows have been calculated using unrounded numbers.

Fiscal year ended

Gross profit as % of consolidated net sales 43.4 % 42.9 % 50 bps

Royalty income as % of consolidated net sales 0.9 % 1.0 % (10) bps

SG&A expenses as % of consolidated net sales 36.6 % 32.4 % 420 bps

Operating income as % of consolidated net sales 6.3 % 10.6 % (430) bps

Loss on extinguishment of debt — 7,823 (7,823) nm

Effective tax rate(*) 18.7 % 19.6 % (90) bps

Basic net income per common share $ 2.51 $ 5.89 $ (3.38) (57.4) %

Diluted net income per common share $ 2.50 $ 5.85 $ (3.35) (57.3) %

Dividend declared and paid per common share $ 0.60 $ 2.00 $ (1.40) (70.0) %

(*)Effective tax rate is calculated by dividing the provision for income taxes by income before income taxes.

Note: Results may not be additive due to rounding. Percentage changes that are considered not meaningful are denoted with "nm".

Consolidated Net Sales

Consolidated net sales decreased $495.0 million, or 14.1%, to $3.02 billion in fiscal 2020. This decrease primarily reflected the temporary closure of our retail stores, particularly during the months of March, April, May, and for many of our stores in Canada and Mexico, in December, and decreased sales to certain of our wholesale customers as a result of disruptions related to the COVID-19 pandemic, partially offset by an increase in net sales through our eCommerce channel. The 53rd week in fiscal 2020 contributed approximately $32.1 million in additional consolidated net sales. Changes in foreign currency exchange rates used for translation in fiscal 2020, as compared to fiscal 2019, had an unfavorable effect on our consolidated net sales of approximately $4.7 million.

Gross Profit and Gross Margin

Our consolidated gross profit decreased $195.1 million, or 12.9%, to $1.31 billion in fiscal 2020. Consolidated gross margin increased 50 bps to 43.4% in fiscal 2020.

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Gross profit is calculated as consolidated net sales less cost of goods sold, and gross margin is calculated as gross profit divided by consolidated net sales. Cost of goods sold include expenses related to the merchandising, design, and procurement of product, including inbound freight costs, purchasing and receiving costs, and inspection costs. Also included in costs of goods sold are the costs of shipping eCommerce product to end consumers. Retail store occupancy costs, distribution expenses, and generally all other expenses other than interest and income taxes are included in SG&A. Distribution expenses that are included in SG&A primarily consist of payments to third-party shippers and handling costs to process product through our distribution facilities, including eCommerce fulfillment costs, and delivery to our wholesale customers and to our retail stores. Accordingly, our gross profit and gross margin may not be comparable to other entities that define their metrics differently.

The decrease in consolidated gross profit was primarily due to decreased net sales across our businesses. The increase in gross margin was primarily due to an increase in eCommerce average selling prices as a result of decreased promotions, as well as decreased product costs, partially offset by the recognition of adverse inventory and fabric purchase commitments from disruptions related to the COVID-19 pandemic, increased excess inventory provisions, and increased inventory-related handling costs. The Company recorded adverse inventory and fabric purchase commitments of $14.7 million and incremental inventory reserve related charges of $4.9 million in fiscal 2020, primarily due to disruptions related to the COVID-19 pandemic.

Royalty Income

Royalty income decreased $8.4 million, or 24.1%, to $26.3 million in fiscal 2020, primarily as a result of decreased licensee sales volume due to business disruptions related to the COVID-19 pandemic. Additionally, in 2019, the Company ended a previous royalty arrangement with Target related to the Genuine Kids by OshKosh brand. The Company now sells the OshKosh brand to Target directly under a wholesale business model.

Selling, General, and Administrative Expenses

Consolidated SG&A expenses decreased $34.9 million, or 3.1%, to $1.11 billion in fiscal 2020 and increased as a percentage of consolidated net sales by approximately 420 bps to 36.6% in fiscal 2020. This increase as a percentage of consolidated net sales was primarily driven by lower net sales as a result of business disruptions related to the COVID-19 pandemic, increased eCommerce distribution and fulfillment costs due to an increase in eCommerce demand, deleverage of retail store expenses, incremental COVID-19 related charges, organizational restructuring charges, impairment charges on operating lease assets, and increased bad debt expense, all partially offset by decreased marketing costs and other reductions in spending.

Goodwill Impairment

During the first quarter of fiscal 2020, the Company's market capitalization declined, and actual and projected sales and profitability decreased as a result of disruptions related to COVID-19. Based on these events, we concluded that a triggering event occurred, and we performed an interim quantitative impairment test as of March 28, 2020. Based upon the results of the impairment test, we recognized a goodwill impairment charge of $17.7 million during the first quarter of fiscal 2020 which was recorded to the Other International reporting unit in the International segment.

Intangible Asset Impairment

In the first quarter of fiscal 2020, the Company recorded non-cash impairment charges of $15.5 million and $11.0 million related to its OshKosh and Skip Hop tradename assets that were recorded in connection with the acquisition of OshKosh B'Gosh, Inc. in July 2005 and Skip Hop Holdings, Inc. in February 2017, respectively. The impairment reflected lower-than-expected actual sales, and lower projected sales and profitability due to decreased demand as a result of disruptions related to COVID-19.

During the third quarter of fiscal 2019, the Company recorded a non-cash impairment charge of $30.8 million related to its Skip Hop tradename asset that was recorded in connection with the acquisition of Skip Hop Holdings, Inc. in February 2017.

Operating Income

Consolidated operating income decreased $182.0 million, or 48.9%, to $189.9 million in fiscal 2020 and decreased as a percentage of net sales by approximately 430 bps to 6.3% in fiscal 2020, primarily due to the factors discussed above.

Interest Expense

Interest expense increased $18.4 million, or 49.0%, to $56.1 million in fiscal 2020. Weighted-average borrowings for fiscal 2020 were $1.03 billion at an effective interest rate of 5.39%, compared to weighted-average borrowings for fiscal 2019 of $662.2 million at an effective interest rate of 5.47%.

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The increase in weighted-average borrowings during fiscal 2020 was attributable to the issuance of $500 million in principal amount of senior notes in May 2020, and to temporarily increased borrowings under our secured revolving credit facility. The decrease in the effective interest rate for fiscal 2020 compared to fiscal 2019 was primarily due to lower London Interbank Offered Rate (“LIBOR”) for the outstanding borrowings on our variable-rate secured revolving credit facility during the fiscal 2020 period.

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 our $400 million in aggregate principal amount of 5.25% senior notes due in 2021. Concurrently, we issued $500 million in aggregate principal amount of 5.625% senior notes due in 2027.

Income Taxes

Our consolidated income taxes decreased $38.9 million, or 60.6%, to $25.3 million in fiscal 2020 and the effective tax rate decreased approximately 90 bps to 18.7% in fiscal 2020 from 19.6% in fiscal 2019. The lower effective tax rate in 2020 primarily reflects a greater portion of our income earned in jurisdictions with a tax rate lower than the U.S. tax rate partially offset by the impact of goodwill impairments in the first quarter of fiscal 2020 with no corresponding tax benefit.

Net Income

Our consolidated net income decreased $154.1 million, or 58.4%, to $109.7 million in fiscal 2020. This decrease was due to the factors previously discussed.

Results by Segment - Fiscal Year 2020 (53 Weeks) compared to Fiscal Year 2019 (52 Weeks)

The following table summarizes net sales and operating income, by segment, for the fiscal years ended January 2, 2021 and December 28, 2019:

Fiscal year ended

Net sales:

Operating income (loss): % of segment net sales % of segment net sales

Comparable Sales Metrics

As a result of the temporary store closures in fiscal 2020 in response to COVID-19, we have not included a discussion of the fiscal 2020 retail comparable sales as we do not believe it is a meaningful metric during the period.

U.S. Retail

U.S. Retail segment net sales decreased $212.5 million, or 11.3%, to $1.67 billion in fiscal 2020. The decrease in net sales was primarily driven by temporary store closures and decreased retail store traffic in response to the COVID-19 pandemic, partially offset by an increase in eCommerce sales. The 53rd week in fiscal 2020 contributed approximately $18.2 million in additional sales to the U.S. Retail segment.

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As of January 2, 2021, we operated 864 retail stores in the U.S. compared to 862 (excluding five temporary Skip Hop stores) in fiscal 2019. All stores were open as of January 2, 2021.

U.S. Retail segment operating income decreased $79.1 million, or 35.0%, to $146.8 million in fiscal 2020. Operating income in fiscal 2020 included intangible asset impairment charges of $13.6 million and $0.5 million related to the OshKosh and Skip Hop tradenames, respectively. Operating income in fiscal 2019 included an intangible asset impairment charge of $1.2 million related to the Skip Hop tradename. Operating margin decreased 320 bps to 8.8% in fiscal 2020. The primary drivers of the decrease in operating margin were a 190 bps increase in gross margin, a 20 bps decrease in royalty income, a 420 bps increase in SG&A rate (SG&A as a percentage of net sales), and the incremental intangible asset impairment charges. The increase in gross margin was primarily due to an increase in eCommerce average selling prices, as a result of decreased promotions, and decreased product costs, partially offset by the recognition of adverse inventory and fabric purchase commitments from disruptions related to the COVID-19 pandemic and increased inventory related handling costs. The decrease in royalty income was primarily due to decreased licensee sales volumes due to business disruptions related to the COVID-19 pandemic. The increase in the SG&A rate was primarily due to increased eCommerce distribution and fulfillment costs due to an increase in eCommerce demand, incremental COVID-19 related charges, deleverage of retail store expenses due to store closures and reduced store traffic, impairment charges on operating lease assets, investments in the U.S. Retail business and technology initiatives, and organizational restructuring charges, partially offset by decreased marketing costs and other reductions in spending.

U.S. Wholesale

U.S. Wholesale segment net sales decreased $209.6 million, or 17.4%, to $996.1 million in fiscal 2020, primarily due to decreased sales to certain of our wholesale customers as a result of disruptions related to COVID-19, partially offset by an increase in net sales in our exclusive Carter’s brands and an increase in average selling price per unit. The 53rd week in fiscal 2020 contributed approximately $10.6 million in additional sales to the U.S. Wholesale segment.

U.S. Wholesale segment operating income decreased $71.1 million, or 33.5%, to $141.5 million in fiscal 2020. Operating income in fiscal 2020 included intangible asset impairment charges of $6.8 million and $1.6 million related to the Skip Hop and OshKosh tradenames, respectively. Operating income in fiscal 2019 included an intangible asset impairment charge of $19.1 million related to the Skip Hop tradename. Operating margin decreased 340 bps to 14.2% in fiscal 2020. The primary drivers of the decrease in operating margin were a 210 bps decrease in gross margin, a 20 bps decrease in royalty income, a 190 bps increase in SG&A rate, and decreased intangible asset impairment charges. The decrease in gross margin was primarily due to the recognition of adverse inventory and fabric purchase commitments from disruptions related to the COVID-19 pandemic, increased excess inventory provisions, and unfavorable customer mix, partially offset by an increase in average selling price per unit and decreased product costs. The decrease in royalty income was primarily a result of our customers’ business disruptions and temporary store closures related to COVID-19 and the initiation of wholesale sales of the OshKosh brand at Target, which replaced a former royalty business model. The increase in the SG&A rate was primarily due to decreased sales due to customers' business disruptions and temporary store closures as a result of the COVID-19 pandemic, incremental COVID-19 related charges, and increased bad debt expense, partially offset by decreased selling expenses as a result of fewer units sold and other reductions in spending.

International

International segment net sales decreased $72.9 million, or 17.0%, to $356.6 million in fiscal 2020. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Mexican peso and between the U.S. dollar and the Canadian dollar, had a $4.7 million unfavorable effect on International segment net sales in fiscal 2020. The decrease in net sales is primarily due to a decrease in retail store sales in Canada and Mexico driven by temporary store closures in response to COVID-19 and decreased wholesale shipments to our international partners as a result of COVID-19, partially offset by growth in Canadian eCommerce and the addition of our Mexico eCommerce business in late fiscal 2019. The 53rd week in fiscal 2020 contributed approximately $3.3 million in additional sales to the International segment.

As of January 2, 2021, we operated 193 retail stores in Canada, of which 60 were open, compared to 201 in fiscal 2019. The Company expects to reopen most of the closed stores in Canada in the middle of the first quarter of fiscal 2021. As of January 2, 2021, we operated 44 retail stores in Mexico, of which 16 were open, compared to 46 in fiscal 2019.

International segment operating income decreased $37.9 million, or 103.3%, to a $1.2 million operating loss in fiscal 2020. Operating loss in fiscal 2020 included a $17.7 million goodwill impairment charge recorded to the Other International reporting unit, a $3.7 million intangible asset impairment charge related to the Skip Hop tradename, and a $0.3 million intangible asset

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impairment charge related to the OshKosh tradename. Operating income in fiscal 2019 included an intangible asset impairment charge of $10.5 million related to the Skip Hop tradename.

Operating margin decreased 880 bps to (0.3)% in fiscal 2020. The decrease in the operating margin was primarily attributable to the goodwill impairment charge partially offset by decreased intangible asset impairment charges, a 160 bps decrease in gross margin, and a 400 bps increase in the SG&A rate. The decrease in gross margin was primarily due to the recognition of adverse inventory and fabric purchase commitments from disruptions related to the COVID-19 pandemic and increased excess inventory provisions, increased inbound transportation costs, and product mix, partially offset by an increase in eCommerce average selling prices and decreased product costs. The increase in the SG&A rate was primarily due to a deleverage of retail stores and distribution expenses as a result of temporary store closures and reduced store traffic, incremental COVID-19 related charges, increased eCommerce distribution and fulfillment costs due to an increase in eCommerce demand, and increased bad debt expense, partially offset by decreased marketing costs and other reductions in spending.

Unallocated Corporate Expenses

Unallocated corporate expenses decreased $6.0 million, or 5.9%, to $97.2 million in fiscal 2020. Unallocated corporate expenses, as a percentage of consolidated net sales, decreased 30 bps to 3.2% in fiscal 2020. The decrease as a percentage of consolidated net sales was a result of spending reductions, including decreased stock-based compensation expense, partially offset by increased organizational restructuring costs.

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 be cash and cash equivalents on hand along with available borrowing capacity under our secured revolving credit facility. In May 2020, through our wholly-owned subsidiary TWCC, we issued $500 million principal amount of senior notes at par. During the second quarter of fiscal 2020, net proceeds from this issuance, along with cash on hand, were used to pay down $500 million of then outstanding borrowings under our secured revolving credit facility that was drawn down in March 2020 to improve liquidity. During the third quarter of fiscal 2020, we repaid the remainder of our borrowings under our secured revolving credit facility with cash on hand. Our cash on hand increased by approximately $888.0 million as of January 2, 2021, compared to December 28, 2019.

We further believe that cash on hand, cash flow from operations, access to additional capital and increased flexibility under financial maintenance covenants, along with reductions in costs, and suspension of our share repurchase program and quarterly cash dividend, will allow us to manage the continuing adverse impact of COVID-19 on our business operations for the foreseeable future. Looking ahead, we have developed contingency plans to reduce costs further if our financial condition deteriorates. We will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19. We believe that our sources of liquidity will fund our projected requirements for at least the next twelve months. These sources of liquidity may be affected by events described in our risk factors, as discussed under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

As of January 2, 2021, we had approximately $1.10 billion of cash and cash equivalents held at major financial institutions, including approximately $85.8 million held at 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 as having acceptable risk profiles.

Balance Sheet

Net accounts receivable at January 2, 2021 were $186.5 million compared to $251.0 million at December 28, 2019. The decrease of $64.5 million, or 25.7%, as compared to December 28, 2019, was primarily a result of reduced customer demand and an increase in our bad debt reserves as a result of COVID-19, offset in part by timing of cash receipts.

Inventories at January 2, 2021 were $599.3 million compared to $594.0 million at December 28, 2019. The increase of $5.3 million, or 0.9%, compared to December 28, 2019, was primarily a result of reduced customer demand and temporary retail store closures in Canada and Mexico at the end of fiscal 2020, partially offset by higher excess inventory provisions from disruptions related to COVID-19.

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Cash Flow

Net Cash Provided by Operating Activities

Net cash provided by operating activities for fiscal 2020 was $589.9 million, compared to $387.2 million in fiscal 2019. Our cash flow provided by operating activities is dependent on net income and changes in our working capital. The increase in net cash provided by operating activities was primarily due to an extension of payment terms and deferrals of retail store lease payments, partially offset by lower earnings related to COVID-19.

Operating cash flow is expected to be unfavorably impacted in fiscal 2021 due to a decrease in payment terms to certain of our vendors and due to the payment of deferred retail store rents from fiscal 2020.

Net Cash Used in Investing Activities

Net cash used in investing activities was $32.9 million in fiscal 2020, compared to $60.7 million in fiscal 2019. This decrease in net cash used in investing activities for fiscal 2020 is primarily due to a decrease in capital expenditures in response to COVID-19. Capital expenditures in fiscal 2020 primarily included $10.6 million for our U.S. and international retail store openings and remodelings, $12.4 million for information technology initiatives, and $8.3 million for our distribution facilities.

We plan to invest approximately $50 million in capital expenditures in fiscal 2021, which primarily relates to critical information technology initiatives, U.S. and international retail store renovations and remodels, investments to strengthen our omni-channel capabilities, and distribution facility initiatives.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $324.8 million in fiscal 2020, compared to net cash used of $283.4 million in fiscal 2019. This increase in net cash provided by financing activities in fiscal 2020 was primarily due to an issuance of $500 million in principal amount of senior notes in May 2020 to improve our cash position in light of the uncertainty and disruption related to COVID-19, decreased repurchases of common stock, and decreased dividend payments, partially offset by the repayment of the remainder of our borrowings under our secured revolving credit facility with cash on hand.

Secured Revolving Credit Facility

To improve our cash position in light of the uncertainty and disruption related to COVID-19, we drew $639.0 million under our secured revolving credit facility in the month of March 2020, and in May 2020 repaid $500 million of the outstanding borrowings with the net proceeds of a new $500 million senior notes offering, as discussed below, and cash on hand. During the third quarter of fiscal 2020, we repaid the remainder of our outstanding borrowings under our secured revolving credit facility with cash on hand. As of January 2, 2021, we had no outstanding borrowings under our secured revolving credit facility, exclusive of $5.0 million of outstanding letters of credit. As of December 28, 2019, we had $100.0 million in outstanding borrowings under our secured revolving credit facility, exclusive of $5.0 million of outstanding letters of credit. As of January 2, 2021 and December 28, 2019, there was approximately $745.0 million and $645.0 million available for future borrowing, respectively. All outstanding borrowings under our secured revolving credit facility are classified as non-current liabilities on our consolidated balance sheets due to 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.

Terms of the Secured Revolving Credit Facility

On August 25, 2017, TWCC and the syndicate of lenders entered into a fourth amended and restated secured revolving credit agreement, which provided for, among other things:

•An extension of the term of the facility to August 25, 2022.

•An increase in the aggregate credit line to $750 million which includes a $650 million U.S. dollar facility and a $100 million multicurrency facility denominated in U.S. dollars, Canadian dollars, Euros, Pounds Sterling, or other currencies agreed to by the applicable lenders. The $650 million U.S. dollar facility is inclusive of a $100 million sub-limit for letters of credit and a swing line sub-limit of $70 million. The $100 million multicurrency facility is inclusive of a $40 million sub-limit for letters of credit and a swing line sub-limit of $15 million. In addition, the amendment provided for incremental borrowing facilities up to $425 million, which are comprised of an incremental $350 million U.S. dollar revolving credit facility and an incremental $75 million multicurrency revolving credit facility. The incremental U.S. dollar revolving credit facility can increase to an unlimited borrowing amount so long as the consolidated first lien leverage ratio (as defined in the secured revolving credit facility) does not exceed 2.25:1.00.

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•Covenants that restrict the Company’s ability to, among other things: (i) create or incur liens, debt, guarantees or other investments, (ii) engage in mergers and consolidations, (iii) pay dividends or other distributions to, and redemptions and repurchases from, equity holders, (iv) prepay, redeem or repurchase subordinated or junior debt, (v) amend organizational documents, and (vi) engage in certain transactions with affiliates.

•Lease Adjusted Leverage Ratio (defined as, with certain adjustments, the ratio of the Company’s consolidated indebtedness plus six times rent expense, as defined, to consolidated net income before interest, taxes, depreciation, amortization, and rent expense (“EBITDAR”)) and the Consolidated Fixed Charge Coverage Ratio (defined as, with certain adjustments, the ratio of consolidated EBITDAR to consolidated fixed charges (defined as interest plus rent expense)) covenants, which were amended by Amendment No.2 (as defined and described below).

•That certain covenants fall away and that the liens over the collateral securing each of the Company and certain subsidiaries' collective obligations are released following, among other things, the achievement of, and during the maintenance of, investment grade ratings by Moody’s Investor Services, Inc. and Standard & Poor’s Ratings Services.

Under the fourth amended and restated secured revolving credit facility, TWCC and its domestic subsidiaries have granted to the collateral agent, for the benefit of the lenders, valid and perfected first priority security interests in substantially all of their present and future assets, excluding certain customary exceptions, and guarantee the obligations of the borrowers. In addition, The Genuine Canadian Corp., as Canadian borrower, and Carter’s Holdings B.V., as Dutch borrower, have each guaranteed the obligations of the other.

On September 21, 2018, TWCC and a syndicate of lenders entered into Amendment No. 1 to its fourth amended and restated credit agreement that, among other things, extended the term of the facility from August 25, 2022 to September 21, 2023.

On May 4, 2020, TWCC entered into Amendment No.2 to its fourth amended and restated credit agreement (“Amendment No. 2”). Amendment No. 2 provided for, among other things, access to additional capital and increased flexibility under financial maintenance covenants, which the Company sought in part due to the unforeseen negative effects of the COVID-19 pandemic.

In particular, Amendment No. 2 provided that the Company may issue additional debt securities in an aggregate principal amount of up to $500 million on or prior to the last day of fiscal 2020 (the “Post-Amendment Debt Issuance”), and must use half of the net cash proceeds from the Post-Amendment Debt Issuance to repay outstanding borrowings under the Secured Revolving Credit Facility (or, if such outstanding borrowings do not exceed an amount equal to half of such net cash proceeds, the amount necessary to repay the borrowings in full). The aggregate gross principal amount outstanding of any Post-Amendment Debt issuance will not count as Consolidated Indebtedness for purposes of leverage determinations under the Secured Revolving Credit Agreement to the extent that the Company’s and certain other subsidiaries’ on-hand cash and cash equivalents is at least equal to the aggregate principal gross amount outstanding of that issuance. On May 11, 2020, TWCC issued $500 million principal amount of senior notes at par, bearing interest at a rate of 5.500% per annum, and maturing on May 15, 2025, as more fully described below.

Additionally, Amendment No.2 provided that:

•The Lease Adjusted Leverage Ratio and the Consolidated Fixed Charge Coverage Ratio covenants were waived during the period from and including the second fiscal quarter of 2020 through and including the fourth fiscal quarter of 2020, and thereafter,

◦the Lease Adjusted Leverage Ratio was set at 5.50:1.00 for the first fiscal quarter of 2021 and, during the remainder of 2021, gradually steps down to 4.00:1.00 for the fourth fiscal quarter of 2021 and, subject to the consummation of a Material Acquisition (as defined in Amendment No.2), thereafter.

◦the Consolidated Fixed Charge Coverage Ratio was set at 1.25:1.00 for the first fiscal quarter of 2021 and, during the remainder of 2021 and, gradually steps back up to 1.85:1.00 for the fourth fiscal quarter of 2021 and, subject to the consummation of a Material Acquisition, thereafter.

•During the period from May 4, 2020 through the date the Company delivers its financial statements and associated certificates relating to the third fiscal quarter of 2021 (the “Restricted Period”), the Company must maintain a minimum liquidity (defined as cash-on-hand plus availability under its secured revolving credit facility) on the last day of each fiscal month of at least $700 million.

•During the Restricted Period, the Company must demonstrate a business need for revolving borrowings if it maintains more than $700 million of cash on-hand at the time of the draw, subject to certain exceptions.

•During Restricted Period, the availability of certain exceptions to the lien, investment, indebtedness, and restricted payment negative covenants (including those related to dividend payments and share repurchases) are limited or

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removed, and any incremental credit extensions and the possibility of collateral and covenant release periods are suspended.

•During the Restricted Period, interest rate margins applicable to the secured revolving credit facility were initially 2.125% for LIBOR rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 1.125% to 2.375%) and 1.125% for base rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 0.125% to 1.375%). Amendment No. 2 also provided for a commitment fee initially equal to 0.35% per annum, and ranging thereafter from 0.15% per annum to 0.40% per annum based upon a leverage-based pricing grid, which is payable quarterly in arrears with respect to the average daily unused portion of the revolving loan commitments.

Approximately $1.2 million, including both bank fees and other third-party expenses, has been capitalized in connection with Amendment No. 2 and is being amortized over the remaining term of the secured revolving credit facility.

Weighted-average borrowings for fiscal 2020 were $212.2 million compared to weighted-average borrowings for fiscal 2019 of $182.5 million. The increase in weighted-average borrowings for fiscal 2020 was primarily due to increased borrowings in the first half of fiscal 2020 to improve our cash position in light of the uncertainty and disruption related to COVID-19.

As of January 2, 2021, the interest rate margins applicable to the amended revolving credit facility were 1.625% for LIBOR rate and 0.625% for base rate loans. There were no U.S. dollar borrowings or foreign currency borrowings outstanding on January 2, 2021. As of December 28, 2019, U.S. dollar borrowings outstanding under the secured revolving credit facility accrued interest at a LIBOR rate plus the applicable base rate, which resulted in a weighted-average borrowing rate of 3.42%. The effective interest rate for fiscal 2020 was 2.84% compared to an effective interest rate of 3.76% for fiscal 2019.

As of January 2, 2021, we were in compliance with our financial and other covenants under our secured revolving credit facility.

Senior Notes

As of January 2, 2021, we had $500.0 million principal amount of senior notes outstanding, bearing interest at a rate of 5.500% per annum, and maturing on May 15, 2025, and $500.0 million principal amount of senior notes outstanding, bearing interest at a rate of 5.625% per annum, and maturing on March 15, 2027. On our consolidated balance sheet, the $1.00 billion of outstanding senior notes as of January 2, 2021 is reported net of $10.5 million of unamortized issuance-related debt costs, and the $500.0 million of outstanding senior notes as of December 28, 2019 is reported net of $5.3 million of unamortized issuance-related debt costs.

The senior notes mentioned above are unsecured and are fully and unconditionally guaranteed by Carter’s, Inc. and certain domestic subsidiaries of TWCC. The guarantor subsidiaries are 100% owned directly or indirectly by Carter’s, Inc. and all guarantees are joint, several and unconditional.

The indentures governing the senior notes provides that upon the occurrence of specific kinds of changes of control, unless a redemption notice with respect to all the outstanding senior notes has previously or concurrently been mailed or delivered, we will be required to make an offer to purchase the senior notes at 101% of their principal amount, plus accrued and unpaid interest to (but excluding) the date of purchase.

The indentures governing the senior notes includes a number of covenants, that, among other things and subject to certain exceptions, restrict TWCC’s ability and the ability of certain of its subsidiaries to: (a) incur certain types of indebtedness that is secured by a lien; (b) enter into certain sale and leaseback transactions; and (c) consolidate or merge with or into, or sell substantially all of the issuer’s assets to, another person, under certain circumstances. Terms of the notes contain customary affirmative covenants and provide for events of default which, if certain of them occur, would permit the trustee or the holders of at least 25.0% in principal amount of the then total outstanding senior notes to declare all amounts owning under the notes to be due and payable. Carter’s, Inc. is not subject to these covenants.

2020 Issuance of Senior Notes

On May 11, 2020, we issued through TWCC $500 million principal amount of senior notes at par, bearing interest at a rate of 5.500% per annum, and maturing on May 15, 2025, all of which were outstanding as of January 2, 2021. We received net proceeds from the offering of the senior notes of approximately $494.5 million, after deducting underwriting fees, which we used to repay borrowings outstanding under our secured revolving credit facility. Approximately $6.5 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.

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2019 Redemption and Issuance of Senior Notes

On March 14, 2019, we redeemed $400.0 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 we 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, we issued through TWCC $500.0 million principal amount of senior notes at par, bearing interest at a rate of 5.625% per annum, and maturing on March 15, 2027. We received net proceeds from the offering of the senior notes of approximately $494.8 million, after deducting underwriting fees and other expenses, which we used to redeem the senior notes discussed above and repay borrowings outstanding under our secured revolving credit facility. Approximately $5.8 million, including both bank fees and other third party expenses, was capitalized in connection with the issuance and is being amortized over the term of the senior notes.

Organizational Restructuring and Office Consolidation

During the first and fourth quarters of fiscal 2020, we announced several organizational restructuring initiatives which included a reorganization of staffing models across multiple functions to drive labor savings and increase efficiencies, the consolidation of certain functions into our corporate headquarters in Atlanta, Georgia, and over 100 planned store closures by the end of fiscal 2021. In conjunction with these initiatives, we incurred restructuring-related charges of approximately $16.6 million for fiscal 2020. The Company paid approximately $4.3 million in severance and other termination benefits during fiscal 2020. As of January 2, 2021, we had approximately $7.7 million in reserves primarily related to severance and other termination benefits expected to be paid in fiscal 2021. We expect to incur additional restructuring-related charges of approximately $2.0 million to $3.0 million through fiscal 2021. These charges primarily relate to accelerated depreciation and severance.

Share Repurchases

On February 13, 2020, our Board of Directors authorized an additional $500 million of share repurchases, for total authorizations, inclusive of authorizations prior to 2019, of up to $1.96 billion.

Open-market repurchases of our common stock during fiscal years 2020 and 2019 were as follows:

For the fiscal year ended

Aggregate cost of shares repurchased (dollars in thousands) $ 45,255 $ 196,910

The total remaining capacity under outstanding repurchase authorizations as of January 2, 2021 was approximately $650.4 million, based on settled repurchase transactions. The share repurchase authorizations have no expiration dates.

On March 26, 2020, we announced that, in connection with the COVID-19 pandemic, we suspended our common stock share repurchase program. While we may elect to resume purchases at any time, the timing and amount of any future repurchases will be determined by the Company based on a number of factors, including restrictions under our revolving credit facility, on our evaluation of market conditions, share price, and other investment priorities.

Dividends

We paid a cash dividend of $0.60 per share in the first quarter of fiscal 2020. On May 1, 2020, in connection with the COVID-19 pandemic, we suspended our quarterly cash dividend. The Board of Directors will evaluate future dividend declarations based on a number of factors, including restrictions under our revolving credit facility, business conditions, our financial performance, and other considerations. We paid a quarterly cash dividend of $0.50 per share in each quarter of fiscal 2019. The dividends were paid during the fiscal quarter in which they were declared.

Provisions in our secured revolving credit facility have the effect of restricting our ability to pay cash dividends on, or make future repurchases of, our common stock through the date we deliver our financial statements and associated certificates relating to the third fiscal quarter of 2021, and could have the effect of restricting our ability to do so thereafter, as described in Item 8 “Financial Statements and Supplementary Data” under Note 8, Long-Term Debt, to the consolidated financial statements.

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Commitments

The following table summarizes as of January 2, 2021, the maturity or expiration dates of mandatory contractual obligations and commitments for the following fiscal years:

(1)Reflects: i) a fixed interest rate of 5.500% for the senior notes due 2025, and ii) a fixed interest rate of 5.625% for the senior notes due 2027.

(2)The minimum lease obligation includes all lease and non-lease components that were included in the measurement of the lease liability.

(3)The table above excludes our reserves for income taxes, as we are unable to reasonably predict the ultimate amount or timing of settlement.

(4)The table above excludes purchase obligations. Our estimate as of January 2, 2021 for commitments to purchase inventory in the normal course of business, which are cancellable (with or without penalty, depending on the stage of production) and span a period of one year or less, was between $300 million and $400 million.

(5)The table above excludes any potential future Company funding for obligations under our defined benefit retirement plans. Our estimates of such obligations as of January 2, 2021 have been determined in accordance with U.S. GAAP and are included in other current liabilities and other long-term liabilities on our consolidated balance sheet, as described in Item 8 “Financial Statements and Supplementary Data” under Note 11, Employee Benefit Plans, to the consolidated financial statements.

Liquidity Outlook

Based on our current outlook, we believe that cash generated from operations and available cash, together with amounts available under our secured revolving credit facility, will be adequate to meet our working capital needs and capital expenditure requirements for the foreseeable future, although no assurance can be given in this regard.

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 accounting principles generally accepted in the United States of America. The 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 from these estimates under different assumptions or conditions.

Our significant accounting policies are described in our accompanying consolidated financial statements. The following discussion addresses our critical accounting policies and estimates, which are those policies that require management's most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue Recognition and Accounts Receivable Allowance

At the beginning of fiscal 2018, we adopted the provisions of Accounting Standards Codification (“ASC”) No. 606, Revenue from Contracts with Customers, and all related amendments (“ASC 606”) using the full retrospective adoption method.

Our revenues, which are reported as Net sales, consist of sales to customers, net of returns, discounts, chargebacks, and cooperative advertising. We recognize revenue when (or as) the performance obligation is satisfied. Generally, the performance obligation is satisfied when we transfer control of the goods to the customer.

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Our retail store revenues, also reported as Net sales, are recognized at the point of sale. Retail sales through our on-line channels are recognized at time of delivery to the customer. We recognize retail sales returns at the time of transaction by recording adjustments to both revenue and cost of goods sold. Additionally, we maintain an asset, representing the goods we expect to receive from the customer, and a liability for estimated sales returns. There are no accounts receivable associated with our retail customers.

Our accounts receivable reserves for wholesale customers include an allowance for expected credit losses and an allowance for chargebacks. The allowance for expected credit losses includes estimated losses resulting from the inability of our customers to make payments. If the financial condition of a customer were to deteriorate, resulting in an impairment of its ability to make payments, an additional allowance could be required. Past due balances over 90 days are reviewed individually for collectibility. Our credit and collections department reviews all other balances regularly. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered. Provisions for the allowance for expected credit losses are reflected in Selling, general and administrative expenses on our consolidated statement of operations and provisions for chargebacks are reflected as a reduction in Net sales on our consolidated statement of operations.

We record cooperative advertising arrangements with certain of our major wholesale customers at fair value. Fair value is determined based upon, among other factors, comparable market analysis for similar advertisements. We have included the fair value of these arrangements of approximately $0.5 million for fiscal 2020, $3.1 million for fiscal 2019, and $3.0 million for fiscal 2018 as a component of SG&A expenses on our consolidated statements of operations, rather than as a reduction of net sales. Amounts determined to be in excess of the fair value of these arrangements are recorded as a reduction of net sales.

Except in very limited circumstances, we do not allow our wholesale customers to return goods to us.

Inventory

Our inventories, which consist primarily of finished goods, are stated approximately at the lower of cost (first-in, first-out basis for wholesale inventory and average cost for retail inventories) or net realizable value. Obsolete, damaged, and excess inventory is carried at net realizable value by establishing reserves after assessing historical recovery rates, current market conditions, and future marketing and sales plans. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases are reflected as reductions in the cost of the related inventory item, and are therefore reflected in cost of goods sold when the related inventory item is sold. The Company also has minimum inventory purchase commitments, including fabric commitments, with our suppliers which secure a portion of our raw material needs for future seasons. In the event anticipated market sales prices are lower than these committed costs or customer orders are canceled, the Company records a reserve for these adverse inventory and fabric purchase commitments. Increases to this reserve are reflected in Costs of goods sold on our consolidated statement of operations. Due to the materiality of these charges in fiscal 2020, these charges have been presented separately on our consolidated statement of operations.

Goodwill and Tradename

The carrying values of goodwill and indefinite-lived tradename assets are subject to annual impairment reviews as of the last day of each fiscal year. Between annual assessments, impairment reviews may also be triggered by any significant events or changes in circumstances affecting our business. Factors affecting such impairment reviews include the continued market acceptance of our current products and the development of new products. We use qualitative and quantitative methods to assess for impairment, including the use of discounted cash flows (“income approach”) and relevant data from guideline public companies (“market approach”).

We perform impairment tests of goodwill at the reporting unit level. A qualitative assessment determines if it is “more likely than not” that the fair value of the reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to: macroeconomic conditions; industry and market considerations; cost factors that may have a negative effect on earnings; overall financial performance; and other relevant entity-specific events. If the results of a qualitative test determine that it is “more likely than not” that the fair value of a reporting unit is less than its carrying value, then a goodwill impairment test using quantitative assessments must be performed. If it is determined that it is not “more likely than not” that the fair value of the reporting unit is less than its carrying value, then no further testing is required.

Under a quantitative assessment for goodwill, we compare the fair value of a reporting unit to its carrying value, including goodwill. We use the income approach and the market approach to determine the fair value of a reporting unit. The assumptions used in these approaches include revenue growth and profitability, terminal values, discount rates, and an implied control premium. These assumptions are consistent with those we believe hypothetical marketplace participants would use. An

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impairment is recorded for any excess carrying value above the fair value of the reporting unit, not to exceed the carrying value of goodwill.

A tradename is considered impaired if the estimated fair value of the tradename is less than the carrying amount. Impairment reviews for an indefinite-lived tradename can be conducted using qualitative analysis, and if necessary, by a quantitative impairment test. If a tradename is considered impaired, we recognize a loss equal to the difference between the carrying amount and the estimated fair value of the tradename. The process of estimating the fair value of a tradename incorporates the relief-from-royalty method, which requires us to make assumptions and to apply judgment, including forecasting revenue growth rates and selecting the appropriate terminal value, discount rate, and royalty rate.

A deterioration of macroeconomic conditions may not only negatively impact the estimated operating cash flows used in our cash flow models, but may also negatively impact other assumptions used in our analysis, including, but not limited to, the estimated cost of capital and/or discount rates. Additionally, we are required to ensure that assumptions used to determine fair value in our analysis are consistent with the assumptions a hypothetical marketplace participant would use. As a result, the cost of capital and/or discount rates used in our analysis may increase or decrease based on market conditions and trends, regardless of whether our actual cost of capital has changed. Therefore, we may recognize an impairment of an intangible asset or assets even though realized actual cash flows are approximately equal to or greater than our previously forecast amounts.

Due to the decrease in the Company’s market capitalization, lower than expected actual sales, and lower projected sales and profitability, primarily due to the impacts from the outbreak of COVID-19, the Company concluded that impairment indicators existed for the first quarter of fiscal 2020. As a result, during the first quarter of fiscal 2020, the Company conducted interim quantitative impairment assessments of 1) the goodwill ascribed to the Other International reporting unit recorded in connection with the allocation of goodwill to the newly created International segment as a result of the acquisition of Bonnie Togs in 2011 and 2) on the value of the Company’s indefinite-lived OshKosh and Skip Hop tradename assets that was recorded in connection with the acquisition of OshKosh B’Gosh Inc. in July 2005 and Skip Hop Holdings, Inc. in February 2017, respectively.

The goodwill impairment assessment for the Other International reporting unit was performed in accordance with ASC 350, “Intangibles--Goodwill and Other” (“ASC 350”) and compares the carrying value of the Other International reporting unit to its fair value. Consistent with prior practice, the fair value of the Other International reporting unit was determined using the income approach and the market approach. As a result of this assessment, a goodwill impairment charge of $17.7 million was recorded to our Other International reporting unit in the International segment during the first quarter of fiscal 2020. The goodwill impairment charge recorded on our Other International reporting unit included charges of $9.4 million, $5.2 million, and $3.1 million to Skip Hop, Carter’s, and Carter’s Mexico goodwill, respectively. The carrying value of the Company’s goodwill for the Other International reporting unit as of January 2, 2021 was $11.8 million.

The OshKosh and Skip Hop indefinite-lived tradename asset assessments were performed in accordance with ASC 350 and were determined using a discounted cash flow analysis which examined the hypothetical cost savings that accrue as a result of not having to license the tradename from another owner. Based on these assessments, charges of $15.5 million and $11.0 million were recorded during the first quarter of fiscal 2020 on our indefinite-lived OshKosh and Skip Hop tradename assets, respectively. The charge recorded on our indefinite-lived OshKosh tradename asset included charges of $13.6 million, $1.6 million, and $0.3 million in the U.S. Retail, U.S. Wholesale, and International segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived OshKosh tradename asset. The charge recorded on our indefinite-lived Skip Hop tradename asset included charges of $6.8 million, $3.7 million, and $0.5 million 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 values of the Company’s indefinite-lived OshKosh and Skip Hop tradename assets as of January 2, 2021 were $70.0 million and $15.0 million, respectively.

In the third quarter of fiscal 2019, the Company’s Skip Hop business experienced lower than expected actual and projected sales and profitability due to lower domestic demand, including the loss of a significant customer that declared bankruptcy (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 in the third quarter of fiscal 2019 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 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 $30.8 million was recorded during the third quarter of fiscal 2019 on our indefinite-lived Skip Hop tradename asset. The charge included charges of $19.1 million, $10.5 million, and $1.2 million 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.

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Based upon our most recent annual assessment, performed as of January 2, 2021, there were no further impairments in the values of goodwill or indefinite-lived or definite-lived intangible assets. This annual assessment indicated that each reporting unit’s fair value exceeded its carrying value by at least 53%. The annual assessment also indicated that the OshKosh and Skip Hop indefinite-lived tradename assets’ fair value exceeded its carrying value by approximately 10% and 40%, respectively. Sensitivity tests on the OshKosh indefinite-lived tradename asset showed that a 100 basis point increase in the discount rate, a 10% decrease in forecasted revenues, or a 25 basis point decrease in the royalty rate was needed to change the conclusion. Although the Company determined that no further impairment exists for the Company’s goodwill or indefinite-lived or definite-lived intangible assets, these assets could be at risk for impairment should global economic conditions continue to deteriorate as a result of COVID-19.

Accrued Expenses

Accrued expenses for workers’ compensation, incentive compensation, health insurance, 401(k), and other outstanding obligations are assessed based on actual commitments, statistical trends, and/or estimates based on projections and current expectations, and these estimates are updated periodically as additional information becomes available.

Loss Contingencies

We record accruals for various contingencies including legal exposures as they arise in the normal course of business. We determine whether to disclose and accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible, or probable. Our assessment is developed in consultation with our internal and external counsel and other advisers and is based on an analysis of possible outcomes under various strategies. Loss contingency assumptions involve judgments that are inherently subjective and can involve matters that are in litigation, which, by their nature are unpredictable. We believe that our assessment of the probability of loss contingencies is reasonable.

Accounting For Income Taxes

As part of the process of preparing the accompanying consolidated financial statements, we are required to estimate our actual current tax exposure (state, federal, and foreign). We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting dates. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. If it is more likely than not that a tax position would not be sustained, then no tax benefit would be recognized. Where applicable, associated interest related to unrecognized tax benefits is recognized as a component of interest expense and associated penalties related to unrecognized tax benefits are recognized as a component of income tax expense.

We also assess permanent and temporary differences resulting from differing basis and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property, plant, and equipment, stock-based compensation expense, and valuation of inventories. Temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or increase such allowance in a period, we must include an expense within the tax provision in the accompanying consolidated statements of operations.

For current and deferred tax provisions, ASC 740 requires entities to account for the effects of new income tax legislation in the same reporting period that the tax legislation is enacted. Changes to tax laws known as the U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) were enacted on December 22, 2017. SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, permitted the Company to calculate and recognize provisional tax estimates for the fourth quarter of fiscal 2017 related to the enactment of the 2017 Tax Act. The Company completed its assessment of the implications of the 2017 Tax Act in 2018. The adjustment to income tax expense recorded in 2018 was not material. Additional information is contained in Item 8 “Financial Statements and Supplementary Data” under Note 12, Income Taxes, to the consolidated financial statements.

Foreign Currency

The functional currency of substantially all of our foreign operations is the local currency.

Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates for the period. The resulting translation adjustments are recorded as a component of Accumulated other comprehensive income (loss) within stockholders’ equity.

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Transaction gains and losses, such as those resulting from the settlement of nonfunctional currency receivables and payables, including intercompany balances, are included in Other expense (income), net in our consolidated statements of operations. Additionally, payable and receivable balances denominated in nonfunctional currencies are marked-to-market at the end of each reporting period, and the gain or loss is recognized in Other expense (income), net in our consolidated statements of operations.

As part of our overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily between the U.S. dollar and the currencies of Canada and Mexico, we may use foreign currency forward contracts to hedge purchases that are made in U.S. dollars, primarily for inventory purchases in our Canadian and Mexican businesses. As part of a hedging strategy, we may use foreign currency forward exchange contracts that typically have maturities of less than 12 months and provide continuing coverage throughout the hedging period. Historically, these contracts have not been designated for hedge accounting treatment, and therefore changes in the fair value of these contracts were recorded in our consolidated statement of operations. Such foreign currency gains and losses include the mark-to-market fair value adjustments at the end of each reporting period related to any open contracts, as well as any realized gains and losses on contracts settled during the reporting period. Fair values for open contracts are calculated by using readily observable market inputs (market-quoted currency exchange rates), classified as Level 2 within the fair value hierarchy. At January 2, 2021, there were no unsettled foreign currency forward contracts.

Employee Benefit Plans

We sponsor a frozen defined benefit pension plan and other unfunded post-retirement plans. The defined benefit pension and post-retirement plans require an actuarial valuation to determine plan obligations, and related periodic costs. Plan valuations require economic assumptions, including expected rates of return on plan assets, discount rates to value plan obligations and employee demographic assumptions including mortality rates. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions. Actual results that differ from the actuarial assumptions are reflected as deferred gains and losses in Accumulated other comprehensive income (loss) within stockholder’s equity. Deferred gains and losses that exceed 10% of the greater of the plan’s projected benefit obligations or market value of assets are amortized to earnings over the estimated service life of the remaining plan participants.

Any future obligation under our pension plan not funded from investment returns on plan assets are expected to be funded from cash flows from operations.

The most significant assumption used to determine the Company’s projected benefit obligation under its defined benefit plans is the discount rate. For further details on rates and assumptions, see Item 8 “Financial Statements and Supplementary Data” under Note 11, Employee Benefit Plans, to the consolidated financial statements.

Stock-Based Compensation Arrangements

We account for the cost resulting from stock-based compensation arrangements at grant date fair value, utilizing the Black-Scholes option pricing model, which requires the use of subjective assumptions. These assumptions include the following:

•Volatility – This is a measure of the amount by which a stock price has fluctuated or is expected to fluctuate. We use actual monthly historical changes in the market value of our stock covering the expected life of stock options being valued. An increase in the expected volatility will increase the fair value of the stock option and related compensation expense.

•Risk-free interest rate – This is the U.S. Treasury rate as of the grant date having a term equal to the expected term of the stock option. An increase in the risk-free interest rate will increase the fair value of the stock option and related compensation expense.

•Expected term – This is the period of time over which the stock options granted are expected to remain outstanding and is based on historical experience and estimated future exercise behavior. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. An increase in the expected term will increase the fair value of the stock option and related compensation expense.

•Dividend yield – We estimate a dividend yield based on the current dividend amount as a percentage of our current stock price. An increase in the dividend yield will decrease the fair value of the stock option and related stock-based compensation expense.

•Forfeitures – We estimate forfeitures of stock-based awards based on historical experience and expected future activity.

Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized in the accompanying consolidated statements of operations.

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We account for performance-based awards over the vesting term of the awards that are expected to vest based on whether it is probable that the performance criteria will be achieved. We reassess the probability of vesting at each reporting period for awards with performance criteria and adjust stock-based compensation expense based on the probability assessments.

During the requisite service period, we recognize a deferred income tax benefit for the expense recognized for U.S. GAAP. At time of subsequent vesting, exercise, forfeiture, or expiration of an award, the difference between our actual income tax deduction, if any, and the previously accrued income tax benefit is recognized in our income tax expense/benefit during the current period.

ITEM 7A. 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 risk and interest rates. These risks, and our strategies to manage our exposure to them, are discussed below.

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. Due to the number of currencies involved, we cannot quantify the potential impact that future currency fluctuations may have on our results of operations 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).

Our foreign subsidiaries typically record sales denominated in currencies other than the U.S. dollar, which are then translated into U.S. dollars using weighted-average exchange rates. The changes in foreign currency exchange rates in fiscal 2020, compared to fiscal 2019, negatively affected our International segment's net sales by approximately $4.7 million.

Fluctuations in exchange rates between the U.S. dollar and other currencies may affect our results of operations, financial position, and cash flows. Transactions by our foreign subsidiaries may be denominated in a currency other than the entity's functional currency. Foreign currency transaction gains and losses also include the impact of intercompany loans with foreign subsidiaries that are marked to market. In our consolidated statement of operations, these gains and losses are recorded within Other expense (income), net. Foreign currency transaction gains and losses related to intercompany loans with foreign subsidiaries that are of a long-term nature are accounted for as translation adjustments and are included in Accumulated other comprehensive income (loss).

As part of our overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily between the U.S. dollar and currencies of Canada and Mexico, we may use foreign currency forward contracts to hedge purchases that are made in U.S. dollars, primarily for inventory purchases for our Canadian and Mexican operations. As part of this hedging strategy, we may use foreign currency forward exchange contracts with maturities of less than 12 months to provide coverage throughout the hedging period.

Interest Rate Risk

Our operating results are subject to risk from interest rate fluctuations on our amended revolving credit facility, which carries variable interest rates. Weighted-average variable rate borrowings for the fiscal year ended January 2, 2021 were $212.2 million. An increase or decrease of 1% in the effective interest rate on that amount would have increased or decreased our annual pretax interest cost for fiscal 2020 by approximately $2.1 million.

Other Risks

We enter into various purchase order commitments with our suppliers. We 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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CARTER’S, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm 43

Consolidated Balance Sheets at January 2, 2021 and December 28, 2019 46

Notes to Consolidated Financial Statements 51

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Carter’s, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Carter’s, Inc. and its subsidiaries (the “Company”) as of January 2, 2021 and December 28, 2019, and the related consolidated statements of operations, of comprehensive income, of changes in stockholders’ equity and of cash flows for each of the three years in the period ended January 2, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 2, 2021 and December 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and

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expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Indefinite-Lived Tradename Impairment Assessment for Skip Hop and OshKosh

As described in Notes 2 and 6 to the consolidated financial statements, the Company’s consolidated indefinite-lived tradename balance was $305.2 million as of January 2, 2021, which includes the OshKosh tradename of $70.0 million and the Skip Hop tradename of $15.0 million. Management performs a review for potential impairment annually as of the last day of each fiscal year or whenever significant events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If the carrying amount exceeds the fair value of the tradename, an impairment charge is recognized in the amount of the excess. Due to the decrease in the Company’s market capitalization, lower than expected actual sales, and lower projected sales and profitability primarily due to the impacts from the outbreak of COVID-19, management concluded that impairment indicators existed for the first quarter of fiscal 2020. As a result, during the first quarter of fiscal 2020, management conducted an interim quantitative impairment assessment which indicated an impairment charge of $15.5 million and $11.0 million related to the OshKosh and Skip Hop tradename assets, respectively.

Management determines fair value of the tradename using a discounted cash flow model that uses the relief- from-royalty method. Significant assumptions in the impairment model includes estimates of revenue growth rates, terminal value, discount rate, and royalty rate.

The principal considerations for our determination that performing procedures relating to the indefinite-lived tradename impairment assessment for OshKosh and Skip Hop is a critical audit matter are (i) the significant judgment by management when determining the fair value of the tradenames; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to estimates of revenue growth rates, terminal values, discount rates, and royalty rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s indefinite- lived tradename impairment assessments, including controls over the valuation of the Company’s Skip Hop and OshKosh indefinite-lived tradenames. These procedures also included, among others, (i) testing management’s process for determining the fair value estimate of the Skip Hop and OshKosh tradenames, (ii) evaluating the appropriateness of the relief-from-royalty method, (iii) testing the completeness and accuracy of underlying data used in the estimate, and (iv) evaluating the significant assumptions used by management related to revenue growth rates, terminal values, discount rates, and royalty rates. Evaluating management’s assumptions related to revenue growth rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the tradename, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s relief-from-royalty method, terminal value, the discount rate, and royalty rate assumptions.

Goodwill Impairment Assessment for Other International Reporting Unit

As described in Notes 2 and 6 to the consolidated financial statements, the Company’s consolidated goodwill balance was $211.8 million as of January 2, 2021, and the goodwill associated with the Other International reporting unit was $11.5 million. Management performs a review for potential impairment annually as of the last day of each fiscal year or whenever significant events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If the carrying amount exceeds the fair value of the reporting unit, an impairment charge is recognized in the amount of the excess. Due to the decrease

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in the Company’s market capitalization, lower than expected actual sales, and lower projected sales and profitability primarily due to the impacts from the outbreak of a COVID-19, management concluded that impairment indicators existed for the first quarter of fiscal 2020. As a result, during the first quarter of fiscal 2020, management conducted an interim quantitative impairment assessment which indicated a goodwill impairment charge of the Other International reporting unit of $17.7 million. Management determines fair value of the reporting unit using a discounted cash flows (“income approach”) and relevant data from guideline public companies (“market approach”). Significant assumptions in the income approach includes estimates of revenue growth and profitability, terminal value, discount rate, and an implied control premium.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for the Other International reporting unit are (i) the significant judgment by management when determining the fair value measurement of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to estimates of revenue growth and profitability, terminal value, discount rate, and implied control premium; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s Other International reporting unit. These procedures also included, among others, (i) testing management’s process for determining the fair value estimate of the Other International reporting unit, (ii) evaluating the appropriateness of the income and market approaches, (iii) testing the completeness and accuracy of underlying data used in the estimate, and (iv) evaluating the reasonableness of significant assumptions related to revenue growth and profitability, terminal value, discount rate and implied control premium. Evaluating management’s assumptions related to revenue growth and profitability involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s income and market approaches and the terminal value, discount rate, and implied control premium assumptions.

/s/ PricewaterhouseCoopers LLP

Atlanta, Georgia

February 26, 2021

We have served as the Company’s auditor since at least 1968. We have not been able to determine the specific year we began serving as auditor of the Company.

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CARTER’S, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except for share data)

ASSETS

Current assets:

Prepaid expenses and other current assets 57,927 48,454

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Commitments and contingencies - Note 18

Stockholders’ equity:

Additional paid-in capital 17,752 —

Accumulated other comprehensive loss (32,760) (35,634)

See accompanying notes to the consolidated financial statements.

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CARTER’S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

For the fiscal year ended

Goodwill impairment 17,742 — —

Loss on extinguishment of debt — 7,823 —

Basic net income per common share $ 2.51 $ 5.89 $ 6.06

Diluted net income per common share $ 2.50 $ 5.85 $ 6.00

Dividend declared and paid per common share $ 0.60 $ 2.00 $ 1.80

See accompanying notes to the consolidated financial statements.

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CARTER’S, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

For the fiscal year ended

Other comprehensive income:

See accompanying notes to the consolidated financial statements.

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CARTER’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

For the fiscal year ended

Cash flows from operating activities:

Goodwill impairment 17,742 — —

Unrealized foreign currency exchange loss (gain), net 361 (564) 271

Loss on extinguishment of debt — 7,823 —

Effect of changes in operating assets and liabilities, net of acquisitions:

Cash flows from investing activities:

Acquisitions of businesses, net of cash acquired — — 96

Disposals and recoveries from property, plant, and equipment — 749 380

Cash flows from financing activities:

Proceeds from senior notes due 2025 $ 500,000 $ — $ —

Premiums paid to extinguish debt — (5,252) —

Withholdings from vesting of restricted stock (5,011) (4,328) (6,830)

See accompanying notes to the consolidated financial statements.

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CARTER’S, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(dollars in thousands)

Withholdings from vesting of restricted stock (57,554) (1) (6,829) — — (6,830)

Restricted stock activity 126,638 1 (1) — — —

Stock-based compensation expense — — 14,673 — — 14,673

Cash dividends declared and paid — — — — (83,717) (83,717)

Withholdings from vesting of restricted stock (46,429) — (4,328) — — (4,328)

Restricted stock activity 213,030 2 (2) — — —

Stock-based compensation expense — — 16,529 — — 16,529

Cash dividends declared and paid — — — — (89,591) (89,591)

Reclassification of tax effects(*) — — — (1,500) 1,500 —

Withholdings from vesting of restricted stock (47,337) — (5,011) — — (5,011)

Restricted stock activity 145,348 1 (1) — — —

Stock-based compensation expense — — 12,830 — — 12,830

Cash dividends declared and paid — — — — (26,260) (26,260)

(*)In the first quarter of fiscal 2019, 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 Accounting Standards Update 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

See accompanying notes to the consolidated financial statements.

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CARTER’S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – THE COMPANY

Carter’s, Inc. and its wholly owned subsidiaries (collectively, the “Company”) design, source, and market branded childrenswear under the Carter’s, OshKosh, Skip Hop,Child ofMine, Just One You, Simple Joys, Carter’s little baby basics, and other brands. The Company’s products are sourced through contractual arrangements with manufacturers worldwide for: 1) wholesale distribution to leading department stores, national chains, and specialty retailers domestically and internationally and 2) distribution to the Company’s own retail stores and eCommerce sites that market its brand name merchandise and other licensed products manufactured by other companies.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Carter’s, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Fiscal Year

The Company’s fiscal year ends on the Saturday in December or January nearest December 31. Every five or six years, our fiscal year includes an additional, or 53rd, week of results. Fiscal 2020, ended on January 2, 2021, contained 53 calendar weeks. Fiscal 2019, ended on December 28, 2019, and fiscal 2018, ended on December 29, 2018, contained 52 calendar weeks.

Certain expenses increased in relationship to the additional revenue from the 53rd week, while other expenses, such as fixed costs and expenses incurred on a calendar-month basis, did not increase. The consolidated gross margin for the additional revenue from the 53rd week is slightly lower than the consolidated gross margin for fiscal 2020 due to increased promotional activity during the 53rd week.

Use of Estimates in the Preparation of the Consolidated Financial Statements

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revision of Previously Issued Financial Statements

During the second quarter of fiscal year 2020, it was determined that there were amounts presented incorrectly in the statement of cash flows for the annual and interim year to date periods subsequent to the December 30, 2018 adoption of ASC 842, Leases, due to the presentation of the non-cash impact of the initial and subsequent recognition of the Right of Use (“ROU”) assets and lease liabilities within the “Prepaid expenses and other assets” and “Accounts payable and other liabilities” line items, respectively, within operating cash flows. This incorrect presentation had no impact on net cash (used in) provided by operating activities for any of the periods. We assessed the materiality of the incorrect presentation and concluded that the previously issued financial statements were not materially misstated. The presentation errors resulted in an offsetting overstatement of cash used for prepaid expenses and other assets and cash provided by accounts payable and other liabilities of $739 million, $773 million and $815 million for the three, six and nine-months ended March 30, 2019, June 29, 2019 and September 28, 2019, respectively, $828 million for the year ended December 28, 2019 and $29 million for the three months ended March 28, 2020. The accompanying consolidated statement of cash flows appropriately reflect the corrected presentation of these non-cash activities. In addition, the Company has reclassified prior comparable period amounts to present ROU asset amortization and lease liability payment activity on a net basis within the “Accounts payable and other liabilities” line item. The revisions to the three, six and nine-months ended March 30, 2019, June 29, 2019 and September 28, 2019 have been presented in previous Form 10-Q filings. The revisions to the year ended December 31, 2019 have been presented in this Form 10-K. Revisions to the three months ended March 31, 2020 will be presented in a future Form 10-Q filing. We will continue to provide supplemental noncash cash flow disclosure information in the notes to the financial statements.

COVID-19

In December 2019, an outbreak of a new strain of coronavirus (“COVID-19”) began in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a pandemic and former President Trump declared a national emergency. As a result of COVID-19, the Company temporarily closed its retail stores in North America and implemented several actions during fiscal 2020 to enhance liquidity and financial flexibility including the deferral of lease payments, reductions in discretionary

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CARTER’S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

spending, amending its revolving credit facility, issuing $500 million principal amount of senior notes, and suspending dividends and share repurchases.

Beginning in April 2020, the Company suspended rent payments under the leases for our temporarily closed stores in North America and initiated discussions with landlords to obtain rent concessions. The Company considered the Financial Accounting Standards Board’s (“FASB”) recent guidance regarding lease concessions as a result of the effects of the COVID-19 pandemic and has elected to treat these rent concessions as lease modifications. As of January 2, 2021, lease modifications resulting from COVID-19 related rent concessions decreased the Company’s operating lease liabilities by $23.7 million during fiscal 2020. The Company continues to negotiate lease concessions with landlords. As of the end of the third fiscal quarter, the Company resumed making the required rent payments under these leases.

On May 4, 2020, the Company, through its wholly owned subsidiary, The William Carter Company (“TWCC”), amended its revolving credit facility. This amendment provided for, among other things, a waiver of financial covenants through the balance of fiscal year 2020, revised covenant requirements through the third quarter of fiscal year 2021, and the ability to raise additional unsecured financing at the Company’s discretion. Additionally, on May 11, 2020, TWCC issued $500 million principal amount of senior notes at par, bearing interest at a rate of 5.500% per annum, and maturing on May 15, 2025. See Note 8, Long-Term Debt, for further details on the amendment to the revolving credit facility and the issuance of $500 million principal amount of senior notes.

The Company announced in the first half of fiscal 2020, that in connection with the COVID-19 pandemic, it suspended its common stock share repurchase program and its quarterly cash dividend.

The Company also assessed certain accounting matters that generally require consideration of forecasted financialinformation in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of January 2, 2021 and through the date of this report filing. The accounting matters assessed included, but were not limited to, our allowance for credit losses, inventory reserves, adverse inventory and fabric purchase commitments, stock based compensation, and the carrying value of our goodwill and other long-lived assets. Based on these assessments, in fiscal 2020, the Company recorded impairments on operating lease assets and other long-lived assets for our underperforming retail stores of $9.0 million, adverse inventory and fabric purchase commitments of $14.7 million, incremental excess inventory reserve related charges of $4.9 million, intangible asset impairments of $26.5 million, and goodwill impairment of $17.7 million. There could be a further material impact to our consolidated financial statements in future reporting periods if, at a future date, the Company determines that these assessments of the magnitude and duration of COVID-19, as well as other factors, were incorrect.

Additional COVID-19 related charges in fiscal 2020 were $21.4 million, which primarily included incremental costs of $12.1 million related to payroll continuation for a period of time for our retail employees and increased employee-related costs at our distribution centers, costs associated with additional protective equipment and cleaning supplies of $8.9 million, and restructuring costs of $2.3 million, partially offset by a payroll tax benefit of $3.5 million.

Foreign Currency Translation and Transactions

Translation Adjustments

The functional currency of substantially all of the Company’s foreign operations is the local currency in each foreign country. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates for the period. The resulting translation adjustments are recorded as a component of Accumulated other comprehensive income (loss) within the accompanying consolidated balance sheets.

Transaction Adjustments

The Company also recognizes gains and losses on transactions that are denominated in a currency other than the respective entity’s functional currency. Foreign currency transaction gains and losses also include the impact of intercompany loans with foreign subsidiaries that are marked to market. Foreign currency transaction gains and losses are recognized in earnings, as a separate component of Other expense (income), net, within the consolidated statements of operations. Foreign currency transaction gains and losses related to intercompany loans with foreign subsidiaries that are of a long-term nature are accounted for as translation adjustments and are included in Accumulated other comprehensive income (loss) within the accompanying consolidated balance sheets.

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CARTER’S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Foreign Currency Contracts

As part of the Company’s overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily between the U.S. dollar and the currencies of Canada and Mexico, the Company may use foreign currency forward contracts to hedge purchases that are made in U.S. dollars, primarily for inventory purchases in its Canadian and Mexican operations. As part of this hedging strategy, the Company may use foreign currency forward exchange contracts with maturities of less than 12 months to provide continuing coverage throughout the hedging period. Historically, these contracts were not designated for hedge accounting treatment, and therefore changes in the fair value of these contracts have been recorded in Other (income) expense, net in the Company’s consolidated statements of operations. Such foreign currency gains and losses typically include the mark-to-market fair value adjustments at the end of each reporting period related to open contracts, as well as any realized gains and losses on contracts settled during the reporting period. The fair values of any unsettled currency contracts are included in other current assets or other current liabilities on the Company’s consolidated balance sheet. On the consolidated statement of cash flows, the Company includes all activity, including cash settlement of any contracts, as a component of cash flows from operations.

Cash and Cash Equivalents

The Company considers all highly liquid investments that have original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of deposit accounts and cash management funds invested in U.S. government instruments. These investments are stated at cost, which approximates fair value. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions; these amounts typically settle in less than five days.

Concentration of Cash Deposits Risk

As of January 2, 2021, the Company had approximately $1.10 billion of cash and cash equivalents in major financial institutions, including approximately $85.8 million in financial institutions located outside of the United States. The Company maintains cash deposits with major financial institutions that exceed the insurance coverage limits provided by the Federal Deposit Insurance Corporation in the U.S. and by similar insurers for deposits located outside the U.S. To mitigate this risk, the Company utilizes a policy of allocating cash deposits among major financial institutions that have been evaluated by the Company and third-party rating agencies as having acceptable risk profiles.

Accounts Receivable

Concentration of Credit Risk

In fiscal 2020, 2019, and 2018, no one customer accounted for 10% or more of the Company’s consolidated net sales.

At January 2, 2021, three wholesale customers each had individual receivable balances in excess of 10% of gross accounts receivable, and the total receivable balances due from these three wholesale customers in the aggregate equaled approximately 69% of total gross trade receivables outstanding. At December 28, 2019, three wholesale customers each had individual receivable balances in excess of 10% of gross accounts receivable, and the total receivable balances due from these three wholesale customers in the aggregate equaled approximately 52% of total gross trade receivables outstanding.

Valuation Accounts for Wholesale Accounts Receivable

Accounts Receivable Reserves

The Company's accounts receivable reserves for wholesale customers include an allowance for expected credit losses and an allowance for chargebacks. The allowance for expected credit losses includes estimated losses resulting from the inability of our customers to make payments. If the financial condition of a customer were to deteriorate, resulting in an impairment of its ability to make payments, an additional allowance could be required. Past due balances over 90 days are reviewed individually for collectibility. The Company’s credit and collections department reviews all other balances regularly. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered. Provisions for the allowance for expected credit losses are reflected in Selling, general and administrative expenses on the consolidated statement of operations and provisions for chargebacks are reflected as a reduction in Net sales on the consolidated statement of operations.

Sales Returns Reserves

Except in very limited instances, the Company does not allow its wholesale customers to return goods to the Company.

Inventories

Inventories, which consist primarily of finished goods, are stated approximately at the lower of cost (first-in, first-out basis for wholesale inventory and average cost for retail inventory) or net realizable value. Obsolete, damaged, and excess inventory is

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carried at net realizable value by establishing reserves after assessing historical recovery rates, current market conditions, and future marketing and sales plans. Rebates, discounts, and other cash consideration received from a vendor related to inventory purchases are reflected as reductions in the cost of the related inventory item, and are therefore reflected in cost of sales when the related inventory item is sold.

Leases

At the beginning of fiscal 2019, the Company adopted the provisions of ASC No. 842, Leases (“ASC 842”), using a modified retrospective approach. 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.

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.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost, less accumulated depreciation and amortization. When fixed assets are sold or otherwise disposed of, the accounts are relieved of the original cost of the assets and the related accumulated depreciation or

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amortization and any resulting profit or loss is credited or charged to income. For financial reporting purposes, depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets as follows: buildings and improvements from 15 to 26 years, retail store fixtures, equipment, and computers from 3 to 10 years. Leasehold improvements and fixed assets purchased under capital lease are amortized over the lesser of the asset life or related lease term. The Company capitalizes the cost of its fixtures designed and purchased for use at major wholesale accounts. The cost of these fixtures is amortized over 3 years.

Internal-Use Software

The Company purchases software licenses from external vendors and also develops software internally using Company employees and consultants. Software license costs, including certain costs to internally develop software, that meet the applicable criteria are capitalized while all other costs are expensed as incurred. Capitalized software is depreciated or amortized on the straight-line method over its estimated useful lives, from 3 to 10 years. If a software application does not include a purchased license for the software, such as a cloud-based software application, the arrangement is accounted for as a service contract. Cloud computing implementation costs incurred in a hosting arrangement that is a service contract and that meet the applicable criteria are capitalized and reported in Prepaid expenses and other current assets on the consolidated balances sheets. Any capitalized costs are amortized over the term of the hosting arrangement, and the expense is presented in the same line item within the consolidated statements of operations as the expense for the service contract's fees.

Goodwill and Other Intangible Assets

Annual Impairment Reviews

The carrying values of the goodwill and indefinite-lived tradename assets are subject to annual impairment reviews which are performed as of the last day of each fiscal year. Additionally, a review for potential impairment is performed whenever significant events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Significant assumptions in the impairment models include estimates of revenue growth and profitability, terminal values, discount rates, an implied control premium, and, in the case of tradenames, royalty rates.

Goodwill

The Company performs impairment tests of its goodwill at the reporting unit level. Qualitative and quantitative methods are used to assess for impairment, including the use of discounted cash flows (“income approach”) and relevant data from guideline public companies (“market approach”).

Under a qualitative assessment, the Company determines if it is “more likely than not” that the fair value of the reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to: macroeconomic conditions, industry and market considerations, cost factors that may have a negative effect on earnings, overall financial performance, and other relevant entity-specific events. If the Company determines that it is “more likely than not” that the fair value of the reporting unit is less than its carrying value, then a goodwill impairment test using quantitative assessments must be performed. If it is determined that it is “not more likely than not” that the fair value of the reporting unit is less than its carrying value, then no further testing is required and the Company documents the relevant qualitative factors that support the strength in the fair value.

Under a quantitative assessment for goodwill, the Company compares the fair value of a reporting unit to its carrying value, including goodwill. The Company uses the income approach and the market approach to determine the fair value of a reporting unit. The assumptions used in these approaches include revenue growth and profitability, terminal values, discount rates, and an implied control premium. These assumptions are consistent with those of hypothetical marketplace participants. An impairment is recorded for any excess carrying value above the fair value of the reporting unit, not to exceed the carrying value of goodwill.

Due to the decrease in the Company’s market capitalization, lower than expected actual sales, and lower projected sales and profitability, primarily due to the impacts from the outbreak of COVID-19, the Company concluded that impairment indicators existed for the first quarter of fiscal 2020. As a result, during the first quarter of fiscal 2020, the Company conducted interim quantitative impairment assessments of 1) the goodwill ascribed to the Other International reporting unit recorded in connection with the allocation of goodwill to the newly created International segment as a result of the acquisition of Bonnie Togs in 2011 and 2) on the value of the Company’s indefinite-lived OshKosh and Skip Hop tradename assets that was recorded in connection with the acquisition of OshKosh B’Gosh Inc. in July 2005 and Skip Hop Holdings, Inc. in February 2017, respectively.

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The goodwill impairment assessment for the Other International reporting unit was performed in accordance with ASC 350, “Intangibles--Goodwill and Other” (“ASC 350”) and compares the carrying value of the Other International reporting unit to its fair value. Consistent with prior practice, the fair value of the Other International reporting unit was determined using the income approach and the market approach. As a result of this assessment, a goodwill impairment charge of $17.7 million was recorded to our Other International reporting unit in the International segment during the first quarter of fiscal 2020. The goodwill impairment charge recorded on our Other International reporting unit included charges of $9.4 million, $5.2 million, and $3.1 million to Skip Hop, Carter’s, and Carter’s Mexico goodwill, respectively. The carrying value of the Company’s goodwill for the Other International reporting unit as of January 2, 2021 was $11.8 million.

Indefinite-lived Tradenames

For indefinite-lived tradenames, the Company may utilize a qualitative assessment, as described above, to determine whether the fair value of an indefinite-lived asset is less than its carrying value. If a quantitative assessment is necessary, the Company determines fair value using a discounted cash flow model that uses the relief-from-royalty method. If the carrying amount exceeds the fair value of the tradename, an impairment charge is recognized in the amount of the excess.

As discussed above, during the first quarter of fiscal 2020, the Company conducted interim quantitative impairment assessments on the value of the Company’s indefinite-lived OshKosh and Skip Hop tradename assets that was recorded in connection with the acquisition of OshKosh B’Gosh Inc. in July 2005 and Skip Hop Holdings, Inc. in February 2017, respectively. The OshKosh and Skip Hop indefinite-lived tradename asset assessments were performed in accordance with ASC 350 and were determined using a discounted cash flow analysis which examined the hypothetical cost savings that accrue as a result of not having to license the tradename from another owner. Based on these assessments, charges of $15.5 million and $11.0 million were recorded during the first quarter of fiscal 2020 on our indefinite-lived OshKosh and Skip Hop tradename assets, respectively. The charge recorded on our indefinite-lived OshKosh tradename asset included charges of $13.6 million, $1.6 million, and $0.3 million in the U.S. Retail, U.S. Wholesale, and International segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived OshKosh tradename asset. The charge recorded on our indefinite-lived Skip Hop tradename asset included charges of $6.8 million, $3.7 million, and $0.5 million 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 values of the Company’s indefinite-lived OshKosh and Skip Hop tradename assets as of January 2, 2021 were $70.0 million and $15.0 million, respectively.

In the third quarter of fiscal 2019, the Company’s Skip Hop business experienced lower than expected actual and projected sales and profitability due to lower domestic demand, including the loss of a significant customer that declared bankruptcy (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 in the third quarter of fiscal 2019 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 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 $30.8 million was recorded during the third quarter of fiscal 2019 on our indefinite-lived Skip Hop tradename asset. The charge included charges of $19.1 million, $10.5 million, and $1.2 million 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.

Based upon our most recent annual assessment, performed as of January 2, 2021, there were no further impairments in the values of goodwill or indefinite-lived or definite-lived intangible assets. This annual assessment indicated that each reporting unit’s fair value exceeded its carrying value by at least 53%. The annual assessment also indicated that the OshKosh and Skip Hop indefinite-lived tradename assets’ fair value exceeded its carrying value by approximately 10% and 40%, respectively. Sensitivity tests on the OshKosh indefinite-lived tradename asset showed that a 100 basis point increase in the discount rate, a 10% decrease in forecasted revenues, or a 25 basis point decrease in the royalty rate was needed to change the conclusion. Although the Company determined that no further impairment exists for the Company’s goodwill or indefinite-lived or definite-lived intangible assets, these assets could be at risk for impairment should global economic conditions continue to deteriorate as a result of COVID-19.

Impairment of Other Long-Lived Assets

The Company reviews other long-lived assets, including operating lease assets, property, plant, and equipment, and licensing agreements, for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Management will determine whether there has been a permanent impairment on such assets held for use in the business by comparing anticipated undiscounted future cash flows from the use and eventual disposition of the asset

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or asset group to the carrying value of the asset. The amount of any resulting impairment will be calculated by comparing the carrying value to fair value, which may be estimated using the present value of the same cash flows. Long-lived assets that meet the definition of held for sale will be valued at the lower of carrying amount or fair value, less costs to sell.

The impact of the COVID-19 pandemic resulted in a qualitative indication of impairment related to our store long-lived assets. In fiscal 2020, the Company recorded impairment charges of operating lease assets and other long-lived assets for our underperforming retail stores of $9.0 million. The impairment charges were recorded in Selling, general and administrative expenses on the Company’s consolidated statements of operations.

Deferred Debt Issuance Costs

Debt issuance costs associated with the Company’s secured revolving credit facility and senior term notes are deferred and amortized to interest expense over the term of the related debt using the effective interest method. Debt issuance costs associated with Company’s senior notes are presented on the Company’s consolidated balance sheet as a direct reduction in the carrying value of the associated debt liability. Fees paid to lenders by the Company to obtain its secured revolving credit facility are included within Other assets on the Company’s consolidated balance sheets and classified as either current or non-current based on the expiration date of the credit facility.

Fair Value Measurements

The fair value framework requires the Company to categorize certain assets and liabilities into three levels, based upon the assumptions used to price those assets or liabilities. The three levels are defined as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

The Company measures its pension assets, deferred compensation plan investment assets, and any unsettled foreign currency forward contracts at fair value. The Company's cash and cash equivalents, accounts receivable, and accounts payable are short-term in nature. As such, their carrying value approximates fair value.

The carrying values of the Company’s outstanding borrowings are not required to be remeasured and adjusted to the then-current fair values at the end of each reporting period. Instead, the fair values of the Company’s outstanding borrowings are disclosed at the end of each reporting period in Note 8, Long-Term Debt, to the consolidated financial statements. Had the Company been required to remeasure and adjust the carrying values of its outstanding borrowings to fair value at the end of each reporting period, such fair value measurements would have been disclosed as a Level 2 liability in the fair value hierarchy.

Revenue Recognition

At the beginning of fiscal 2018, the Company adopted the provisions of ASC 606 using the full retrospective adoption method.

The Company uses the five-step model to recognize revenue:

1)Identify the contract with the customer;

2)Identity the performance obligation(s);

3)Determine the transaction price;

4)Allocate the transaction price to each performance obligation if multiple obligations exist; and

5)Recognize the revenue when the performance obligations are satisfied

Performance Obligations

The Company identifies each distinct performance obligation to transfer goods (or bundle of goods). The Company recognizes revenue when (or as) it satisfies a performance obligation by transferring control of the goods to the customer. Other than inbound and outbound freight and shipping arrangements, the Company does not use third parties to satisfy its performance obligations in revenue arrangements with customers.

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When Performance Obligations Are Satisfied

Wholesale Revenues - The Company typically transfers control upon shipment. However, in certain arrangements where the Company retains the risk of loss during shipment, satisfaction of the performance obligation occurs when the goods reach the customer.

Retail Revenues - For transactions in stores, the Company satisfies its performance obligation at point of sale when the customer takes possession of the goods and tenders payment. For purchases made through the Company's eCommerce channel, revenue is recognized when the goods are physically delivered to the customer.

Loyalty program - Retail customers can earn loyalty points that accumulate towards earning reward certificates that are redeemable for a specified amount off of future purchases for a specified period of time. Points and reward certificates earned by retail customers under the Company’s loyalty program represent a separate performance obligation. For transactions where a customer earns loyalty points, the Company allocates revenue between the goods sold and the loyalty points expected to be earned towards a reward certificate based upon the relative standalone selling price. The revenue that is deferred is recorded within Other current liabilities on the Company’s consolidated balance sheets and then recognized as revenue upon redemption of the reward certificate. Loyalty program breakage is recognized as revenue based on the customer redemption pattern.

Gift Cards - Customer purchases of gift cards are not recognized as revenue until the gift card is redeemed. The revenue that is deferred is recorded within Other current liabilities on the Company’s consolidated balance sheets. Gift card breakage is recognized as revenue based on the customer redemption pattern.

Royalty Revenues - The Company satisfies its performance obligations with licensees over time as customers have the right to use the intellectual property over the contract period.

Significant Payment Terms

Retail customers tender a form of payment, such as cash or a credit/debit card, at point of sale. For wholesale customers and licensees, payment is due based on established terms.

Returns and Refunds

The Company establishes return provisions for retail customers. Except in very limited instances, the Company does not allow its wholesale customers to return goods to the Company.

Significant Judgments

Sale of Goods - The Company relies on shipping terms to determine when performance obligations are satisfied. When goods are shipped to wholesale customers “FOB Shipping Point,” control of the goods is transferred to the customer at the time of shipment if there are no remaining performance obligations. The Company recognizes the revenue once control passes to the customer. For most retail transactions in stores, no significant judgments are involved since revenue is recognized at the point of sale when tender is exchanged and the customer receives the goods. For retail transactions made through the Company's eCommerce channel, revenue is recognized when the goods are physically delivered to the customer. The Company recognizes revenue from omni-channel sales, including buy on-line and pick up in store, buy-on-line, ship-to-store, and buy-on-line, deliver-from-store, when the product is physically delivered to the customer or when the product arrives at the store and has been picked up by the customer.

Royalty Revenues - The Company transfers the right-to-use benefit to the licensee for the contract term and therefore the Company satisfies its performance obligation over time. Revenue recognized for each reporting period is based on the greater of: 1) the royalties owed on actual net sales by the licensee and 2) a minimum royalty guarantee, if applicable.

Transaction Price - The transaction price is the amount of consideration the Company expects to receive under the arrangement. The Company is required to estimate variable consideration (if any) and to factor that estimation into the determination of the transaction price. The Company may offer sales incentives to wholesale and retail customers, including discounts. For retail transactions, the Company has significant experience with return patterns and relies on this experience to estimate expected returns when determining the transaction price.

Standalone Selling Prices - For arrangements that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation on a relative standalone selling price basis.

Costs Incurred to Obtain a Contract - Incremental costs to obtain contracts are not material to the Company.

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Policy Elections

In addition to those previously disclosed, the Company has made the following accounting policy elections and practical expedients:

•Portfolio Approach - The Company uses the portfolio approach when multiple contracts or performance obligations are involved in the determination of revenue recognition.

•Taxes - The Company excludes from the transaction price any taxes collected from customers that are remitted to taxing authorities.

•Shipping and Handling Charges - Charges that are incurred before and after the customer obtains control of goods are deemed to be fulfillment costs.

•Time Value of Money - The Company’s payment terms are less than one year from the transfer of goods. Therefore, the Company does not adjust promised amounts of consideration for the effects of the time value of money.

•Disclosure of Remaining Performance Obligations - The Company does not disclose the aggregate amount of the transaction price allocated to remaining performance obligations for contracts that are one year or less in term.

The Company records its cooperative advertising arrangements with certain of its major wholesale customers at fair value. Fair value is determined based upon, among other factors, comparable market analysis for similar advertisements. The Company has included the fair value of these arrangements of approximately $0.5 million for fiscal 2020, $3.1 million for fiscal 2019, and $3.0 million for fiscal 2018 as a component of Selling, general, and administrative expenses on the accompanying consolidated statements of operations, rather than as a reduction of Net sales. Amounts determined to be in excess of the fair value of these arrangements are recorded as a reduction of Net sales.

Costs of Goods Sold and Selling, General and Administrative Expenses

In addition to the cost of product, cost of goods sold include changes to our inventory reserve and expenses related to the merchandising, design, and procurement of product, including inbound freight costs, purchasing and receiving costs, and inspection costs. Also included in costs of goods sold are the costs of shipping eCommerce product to end consumers. For omni-channel transactions, costs of goods sold include the costs of shipping product to end customers or to retail stores.

Retail store occupancy costs, distribution expenses, and generally all expenses other than interest and income taxes are included in Selling, general, and administrative “SG&A”. Distribution expenses that are included in SG&A primarily consist of payments to third-party shippers and handling costs to process product through our distribution facilities, including eCommerce fulfillment costs, and delivery to our wholesale customers and to our retail stores. Distribution expenses included in SG&A totaled $190.7 million, $191.1 million, and $188.9 million for fiscal years 2020, 2019, and 2018, respectively.

Gross Profit

Gross profit is calculated as consolidated net sales less cost of goods sold, and gross margin is calculated as gross profit divided by consolidated net sales. Definitions of gross profit and gross margin vary across the industry and, as such, our metrics may not be comparable to other companies.

Income from Royalties and License Fees

We license our Carter’s, OshKosh, Child of Mine, Just One You, Simple Joys, and Carter's little baby basics brands to partners to expand our product offerings to include bedding, cribs, diaper bags, footwear, gift sets, hair accessories, jewelry, outerwear, paper goods, socks, shoes, swimwear, and toys. These royalties are recorded as earned, based upon the sales of licensed products by licensees and reported as royalty income in the statements of operations.

Advertising Expenses

Costs associated with the production of advertising, such as writing, copy, printing, and other costs, are expensed as incurred. Costs associated with communicating advertising that has been produced, such as magazine costs and eCommerce site banners, are expensed when the advertising event takes place.

Stock-Based Compensation Arrangements

The Company recognizes the cost resulting from all stock-based payment transactions in the financial statements at grant date fair value. Stock-based compensation expense is recognized over the requisite service period, net of estimated forfeitures. During the requisite service period, the Company also recognizes a deferred income tax benefit for the expense recognized for U.S. GAAP. At time of subsequent vesting, exercise, forfeiture, or expiration of an award, the difference between the

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Company’s actual income tax deduction, if any, and the previously accrued income tax benefit is recognized in income tax expense/benefit during the current period.

Stock Options

The Company determines the fair value of stock options using the Black-Scholes option pricing model, which requires the use of the following subjective assumptions: