Carter : 2023 Annual Report

Carter's, Inc. 2023 Annual Report

April 4, 2024

Dear Fellow Shareholders,

Carter's continues to be the best-selling brand of young children's apparel in North America. We have the largest share of a $32 billion market focused on newborn to 10-year-old children, including the largest market share in each of the United States, Canada, and Mexico.

We own two of the best-known brand names in children's apparel, Carter's and OshKosh B'gosh. Both brands have served the needs of multiple generations of families for over 100 years. We also own Little Planet, our innovative, eco-friendly brand comprised of organic fabrics and sustainable materials, and Skip Hop, a lifestyle brand for families with young children.

Carter's multi-channel business model provides us with unparalleled global distribution capabilities. We are the largest specialty retailer in North America focused on young children's apparel. We operate over 1,000 stores and an award-winning eCommerce website with integrated omnichannel capabilities which provide a convenient shopping experience for families with young children.

Carter's is also the largest supplier to the most successful retailers of children's apparel in North America, including Target, Walmart, Amazon, Kohl's, and Macy's. Together with our wholesale customers, our brands are sold in over 20,000 points of distribution in over 90 countries.

Prior to the pandemic, Carter's achieved 31 consecutive years of sales growth and achieved top quartile operating margins relative to our peer group. The global pandemic and surge in inflation in recent years have weighed on families with young children and their demand for our brands.

Our target consumers are women and men in their late twenties and early thirties, earlier in their careers, starting their lives together and raising young children. Surveys last year indicated that over two-thirds of adults in the United States were living paycheck to paycheck. It is fair to assume that a higher percentage of our target consumers have been particularly affected by the higher cost of living.

To strengthen Carter's through the challenging market conditions in recent years, we focused on margin preservation and cash flow driven by structural improvements in our business, which included:

• the reduction of low-margin product choices;
• closure of low-margin stores;
• improved inventory management;
• more effective promotions; and
• improved price realization.

Last year, we continued to see benefits from these structural improvements which enabled the following financial results for fiscal year 2023:

• $2.9 billion in consolidated sales;
• double-digitoperating margins in each of our U.S. Retail, U.S. Wholesale, and International business segments;
• $323 million of operating income;

• 28% reduction in inventories;
• $529 million of operating cash flow; and
• $1.2 billion of liquidity at year end.

Carter's has a long track record of growth, profitability, and cash flow. Over the past 10 years, we generated over $3.5 billion in operating cash flow and returned over $2.5 billion of capital to shareholders through share repurchases and dividends. We believe our strong balance sheet and liquidity provide significant flexibility to manage through challenging market cycles and pursue new growth opportunities.

2024 STRATEGIC PRIORITIES

To return to growth this year, we will continue to focus on providing the very best style, value, and experience in young children's apparel.

We have negotiated lower product costs for 2024. We have invested some of that cost reduction to strengthen our product offerings and lower prices on certain essential core products to drive growth in unit volume and sales.

Given the improved trend in consumer sentiment, and stability in the children's apparel market and annual births, we are planning low single-digit growth in sales and mid-single-digit growth in earnings this year.

To achieve our growth objectives, we are focused on the following key strategies:

• strengthen our U.S. Retail business;
• improve marketing effectiveness to drive traffic;
• grow U.S. Wholesale sales through tailored strategies; and
• expand globally.

Driving each of these growth strategies is our focus on elevating the style and value of our product offerings.

Strengthen our U.S. Retail Business

Last year, our U.S. Retail business generated $1.5 billion in sales, which represented over 50% of our consolidated sales. We plan to return to growth in comparable U.S. Retail sales this year. We expect the growth will be driven by the strength of our product offerings, continued fleet optimization, including store openings, new store formats and remodels, and new marketing capabilities.

For the first time in four years, Carter's is not burdened by excess pack and hold inventory caused by the slowdown in consumer demand following the pandemic in 2020 and the surge in inflation in 2022. Given our progress working down that excess inventory last year, we believe we have a better mix of fresh product choices for consumers this year with on-trend colors, prints, silhouettes, and fabrications.

We believe our stores provide the very best presentation of our brands and are our primary source of new customer acquisition. We expect to see the benefits from our continued fleet optimization strategies this year. Over the past four years, we have focused on closing low-margin stores upon lease expiration and opening stores in higher-traffic centers.

In 2024, we plan to open 40 stores and close 30 stores. We also plan to increase our investment in store remodels which improves the shopping experience for consumers and our sales.

We tested new store models this past year. Given the results of those tests, certain store openings this year are planned to focus exclusively on our Baby and Toddler product offerings. These stores will enable us to curate our best product offerings for families shopping for a newborn to about a 4-year-old child.

We also tested a new format for our 150 side-by-side stores. These stores provide apparel and related accessories for a newborn to about a 10-year-old child.

In years past, our side-by-side stores had our Carter's brand on one side of the store and our OshKosh brand on the other side. Going forward, our side-by-side stores will be merchandised by age segment, with the best of our Baby and Toddler product offerings on one side of the store and the best of our product offerings for older children on the other side. We believe this new store model improves the convenience and shopping experience for families with young children and has improved the performance of these stores.

Approximately 70% of children's apparel is purchased in stores. Increasingly, our stores enable the same-day fulfillment of online purchases. Our stores also provide attractive returns on investment. Over the next five years, we plan to open approximately 200 stores, net of closures, in the United States.

Improve Marketing Effectiveness to Drive Traffic

In 2023, we invested in new capabilities and resources to improve traffic to our stores and websites. In 2024, we will have the first full year benefit of a new media agency. Among other things, this firm guides us on the highest and best use of marketing investments in social media, where increasingly parents exchange thoughts and recommendations on their favorite apparel brands.

Carter's leads the children's apparel market in social media engagement. We have the largest following on TikTok, Instagram, and Facebook for children's apparel. We have also engaged a new creative agency this year to help us better communicate the beauty, value, and quality of our brands.

We have one of the most highly-rated loyalty programs in the market. Over 90% of consumers shopping in our U.S. Retail business last year were in our loyalty program. This Spring, we plan to launch a redesigned and rebranded loyalty program. The new program will enable consumers to earn rewards quicker, which we believe will improve traffic and the frequency of visits.

This past year, we launched new marketing personalization capabilities which enable us to better analyze consumer shopping behaviors and tailor our brand marketing to each consumer based on the age and gender of the child. This is a good example of how we are using artificial intelligence capabilities to improve marketing effectiveness and better serve consumers.

Grow U.S. Wholesale Sales Through Tailored Strategies

In 2023, our U.S. Wholesale business generated $1.0 billion in sales, representing 34% of our consolidated sales. We continue to invest in new brand marketing for our exclusive product offerings sold at Target and Walmart. This new point-of-sale marketing has enabled Carter's to have the most prominent brand presence in two of the largest and most successful retailers of young children's apparel. Our exclusive brands represented over 50% of our U.S. Wholesale sales last year and are expected to be a good source of growth for us in the years ahead.

In 2024, we have tailored our product and marketing strategies to respond to the unique needs of our department store and club retail customers. We believe these customer-specific strategies, which include exclusive product configurations, may enable growth with certain customers this year.

Expand Globally

In 2023, our International business generated approximately $430 million in sales, or 15% of our consolidated sales. Our sales in Canada, Mexico, and Brazil, collectively, contributed about 85% of our International sales.

In the years ahead, we expect our International growth will be driven through our direct-to-consumer and omnichannel capabilities in Canada and Mexico, expansion through our wholesale partner in Brazil, and growth with other wholesale customers representing our brands in over 90 countries outside of North America through over 1,200 points of distribution and 100 websites.

MARKET LEADER

Carter's is the market leader in young children's apparel with unparalleled relationships with the largest retailers in North America. No other company in young children's apparel has broader distribution capabilities serving the needs of families with young children.

As demonstrated in recent years, Carter's has multiple levers that have enabled us to manage through historic periods of market turmoil and volatility. Inflation is moderating and real wages are rising. Gas and food prices are still elevated, but consumers have shown remarkable resilience adjusting to the inflationary environment. We believe we are well positioned to benefit from the continued market recovery in the years ahead.

I want to recognize and thank our over 16,000 employees worldwide who helped us achieve a strong finish to 2023. I am grateful for their continued support and their contribution to our plan to return to growth this year.

On behalf of our employees, Board of Directors, and Leadership Team, thank you for your investment in Carter's.

Sincerely,

Michael D. Casey

Chairman and Chief Executive Officer

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April 4, 2024

Dear Shareholders,

It is my pleasure to invite you to attend our 2024 Annual Meeting of Shareholders on Thursday, May 16, 2024 at 1:00 P.M. Eastern Time (the "Annual Meeting").

Our annual meeting will be held in a virtual format. The attached 2024 Notice of Annual Meeting of Shareholders and Proxy Statement describe the formal business to be conducted at the meeting.

Whether or not you plan to attend the Annual Meeting, your shares can be represented if you promptly submit your voting instructions over the internet, by telephone, by returning your proxy card in the enclosed envelope, or by following the instructions you have received from your broker or other nominee.

On behalf of our board of directors and leadership team, thank you for your investment in Carter's.

Sincerely,

Michael D. Casey

Chairman of the Board, Chief Executive Officer

& President

Proxy