Carter's Annual Report 2014

Plain-text annual report

Carter’s, Inc. 3438 Peachtree Road NE, Suite 1800 Atlanta, GA 30326 | 678.791.1000 carters.com | oshkoshbgosh.com C a r t e r ’ s , I n c . 2 0 1 4 A n n u a l R e p o r t Carter’s, Inc. 2014 Annual Report 46496_Cov.indd 1 46496_Cov.indd 1 3/30/15 12:27 PM 3/30/15 12:27 PM C a r t e r ’ s , I n c . 2 0 1 2 A n n u a l R e p o r t Welcome a new generation. Carter’s, Inc. | 1170 Peachtree Street NE, Suite 900 | Atlanta, Georgia 30309 | 404-745-2700 carters.com | oshkoshbgosh.com 46496_Cov.indd 2 46496_Cov.indd 2 3/30/15 12:27 PM 3/30/15 12:27 PM For everything from bodysuits to For everything from bodysuits to For everything from bodysuits to booties, bath time to bedtime, we booties, bath time to bedtime, we booties, bath time to bedtime, we are America’s most trusted brand are America’s most trusted brand are America’s most trusted brand of baby and kid’s clothing. of baby and kid’s clothing. of baby and kid’s clothing. 46496_Txt.indd 3 46496_Txt.indd 3 3/30/15 10:44 PM 3/30/15 10:44 PM Dear Fellow Shareholders, We made good progress strengthening our business in 2014. We achieved record sales and proﬁ ts, improved our leading market share positions in the United States and Canada, strengthened our direct-to-consumer and wholesale businesses, and delivered strong returns for our shareholders. 2014 Highlights • Increased net sales by 10% to $2.9 billion, our 26th consecutive year of sales growth • Grew our total U.S. direct-to-consumer business by 14% • Improved our U.S. market share by 50 basis points to 16.4% • Grew International sales by 11% • Achieved record operating proﬁ t of $333 million • Returned $123 million to shareholders through share repurchases and dividends Our Vision and Focus We aspire to be the world’s favorite brands in young children’s apparel. We are the largest branded marketer of young children’s apparel in the United States and Canada. Given the level of international demand for our Carter’s and OshKosh B’gosh brands on our U.S. website, we are pursuing new market opportunities for growth globally and plan to launch eCommerce capabilities in China this year. Over the past 10 years, our annual sales and earnings have grown, on average, by 13% and 16%, respectively, on a compounded basis. We plan to build on this record of success by focusing on the following priorities for our business: • Provide the best value and experience in young children’s apparel Our success over many years has been driven by our focus on providing superior value compared to private label and specialty store brands. Carter’s and OshKosh B’gosh are two of the most well-known and trusted brands in young children’s apparel, especially in our core baby and toddler size ranges where both brands have been known for quality and value by generations of consumers. To provide the best value to consumers, we continue to strengthen our merchandising, design, and supply chain capabilities. We have an extraordinarily talented and experienced team of professionals throughout our Company. Their commitment to strengthen our brands is reﬂ ected in our results. In 2014, we continued to lead and gain share in the $20 billion U.S. market. Our total U.S. market share of 16.4% is over 80% greater than our largest competitor. Our growth in Canada this past year enabled us to earn the leading brand position in this $2 billion market with a 12.4% share. We strive for highly impactful brand presentations wherever consumers shop for young children’s apparel, including national and regional retailers, our stores, and our websites. We partner and invest with our wholesale customers to ensure that our ﬁ xtures, signage, and imagery diff erentiate our brands on their selling ﬂ oors and websites. We believe our strong relationships with the largest retailers in the United States and Canada provide us with market insights greater than any other company in young children’s apparel. We use these insights to help strengthen our performance in every channel of distribution. Our Carter’s and OshKosh B’gosh stores and websites are essential components of our brand building strategy. These channels enable us to showcase the full breadth, beauty, and value of our product off erings. In recent years, we have refreshed older stores, removed ﬁ xtures to improve shopability, improved the ﬂ ow of inventory, and strengthened our value proposition. We continue to grow our Carter’s and OshKosh side-by-side store model which provides consumers with a diff erentiated experience by presenting the best selection of our brands in one convenient location. 46496_Txt.indd 4 46496_Txt.indd 4 3/30/15 10:44 PM 3/30/15 10:44 PM • Extend the reach of our brands Our multi-channel business model provides us with the broadest distribution of young children’s apparel in the United States and Canada. With nearly 18,000 points of distribution, we are the largest supplier of young children’s apparel to the largest retailers in North America. We believe we can continue to grow our wholesale business by improving the scope and performance of our brands with our wholesale partners. Over the past decade, we successfully extended the Carter’s outlet model by opening our stores in more conveniently located shopping centers. In 2014, we grew our total U.S. direct-to-consumer business by 14% by opening 55 Carter’s stores, 19 OshKosh stores, and by growing our eCommerce sales by 28%. In the United States, we operate over 700 Carter’s and OshKosh stores, approximately 400 of which are ‘brand’ stores located in off -mall shopping centers. Looking forward, we believe we have the opportunity to open approximately 300 Carter’s and 250 OshKosh stores over the next ﬁ ve years, with most openings expected to be in our side-by-side store format. Internationally, our brands are sold in over 65 countries through retail, wholesale, eCommerce, and licensing arrangements. In recent years, we have replicated our U.S. multi-channel business model in Canada, including the launch of eCommerce capabilities in 2014. Canada is the largest component of our international business, and we believe this market will be the most signiﬁ cant contributor to our international growth over the next ﬁ ve years. We are pursuing new opportunities in China and Brazil, and assessing the full potential of relationships with our international partners representing our brands throughout the world. • Improve proﬁ tability We achieved a record level of proﬁ tability in 2014, in part due to our ongoing focus on managing costs which resulted in meaningful expense leverage. Our operating margin last year was among the best in our peer group. We believe we can continue to improve our proﬁ tability by: - increasing the mix of retail, eCommerce, and international sales; - growing our direct sourcing capabilities; - leveraging our distribution expenses; - strengthening inventory management; and - improving OshKosh proﬁ tability. Given the multiple opportunities to strengthen our business, we plan to further improve our operating margin over the next ﬁ ve years. Our brands have served the needs of families with young children for multiple generations. In 2015, Carter’s will celebrate its 150th anniversary. We are focused on building on our long track record of success by strengthening our brands and providing superior value to consumers for many years to come. On behalf of our Board of Directors, Leadership Team, and all of our dedicated employees, thank you for your investment in Carter’s. Sincerely, Michael D. Casey Chairman and Chief Executive Offi cer March 31, 2015 46496_Txt.indd 5 46496_Txt.indd 5 3/30/15 10:44 PM 3/30/15 10:44 PM Our Story Carter’s, Inc. owns the largest share of the $20 billion baby and young children’s apparel market (ages zero to seven) in the United States as well as the $2 billion market in Canada. We own two of the best known and trusted brand names in young children’s apparel, Carter’s and OshKosh B’gosh. Both of these iconic brands have more than 100 years of rich history; Carter’s was established in 1865 and OshKosh B’Gosh in 1895. Our Genuine Kids, Just One You, and Precious Firsts brands are sold at Target, and our Child of Mine brand is sold at Walmart. We have the broadest distribution of young children’s apparel in the market. In 2014, our multi-channel business model generated $2.9 billion in net sales. In the United States, we reach a wide range of consumers through nearly 18,000 wholesale locations, including the largest retailers in the country, 731 Company- operated stores, and our websites. Internationally, we reach consumers in over 60 countries through wholesale and licensing relationships, in over 100 countries through our websites, and through 124 Company-operated stores in Canada. We serve the needs of families with young children by providing a strong value in our product off erings, including baby apparel, sleepwear, playclothes, and related accessories. Financial Highlights (dollars in thousands, except per share data) Summary of Operations As reported (a) Net sales Gross margin Operating income Operating margin Net income Diluted earnings per share Fiscal 2014 Fiscal 2013 Fiscal 2012 $2,893,868 $2,638,711 $2,381,734 40.9% $333,345 11.5% $194,670 $3.62 41.5% $264,151 10.0% $160,407 $2.75 39.4% $261,986 11.0% $161,150 $2.69 $278,619 Net cash provided by operating activities $282,397 $209,696 As adjusted (b) Operating income Operating margin Net income Diluted earnings per share $359,257 12.4% $211,493 $3.93 $319,832 $275,065 12.1% $196,532 $3.37 11.5% $170,717 $2.85 (a) Results “as reported” are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). (b) Results “as adjusted” are non-GAAP ﬁ nancial measurements. A reconciliation of results “as reported” to results “as adjusted” immediately follows our Annual Report on Form 10-K. Comparison of Five Year Cumulative Total Return* Among Carter’s, Inc., the S&P 500 Index, the S&P Midcap 400 Index, and the S&P Apparel Retail Index $350 $300 $250 $200 $150 $100 $50 Carter’s, Inc. S&P 500 S&P Midcap 400 S&P Apparel Retail 12/09 12/10 12/11 12/12 12/13 12/14 * $100 invested on 12/31/09 in stock or index, including reinvestment of dividends. Year ending December 31. Copyright© 2015 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. 46496_Txt.indd 6 46496_Txt.indd 6 3/30/15 10:44 PM 3/30/15 10:44 PM Form 10-K F o r m 1 0 - K 2014 Annual Report 46496_10k.pdf Page 1 46496_10k.pdf Page 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES FORM 10-K EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 3, 2015 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission file number: 001-31829 CARTER’S, INC. (Exact name of Registrant as specified in its charter) Delaware (state or other jurisdiction of incorporation or organization) 13-3912933 (I.R.S. Employer Identification No.) Phipps Tower 3438 Peachtree Road NE, Suite 1800 Atlanta, Georgia 30326 (Address of principal executive offices, including zip code) (678) 791-1000 (Registrant’s telephone number, including area code) F o r m 1 0 - K SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each Exchange on which Registered Carter’s, Inc.’s common stock par value $0.01 per share New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer È Non-Accelerated Filer ‘ Accelerated Filer ‘ Smaller Reporting Company ‘ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È The approximate aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 28, 2014 (the last business day of our most recently completed second quarter) was $3,623,223,632. There were 52,804,427 shares of Carter’s, Inc. common stock with a par value of $0.01 per share outstanding as of the close of business on February 20, 2015. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the Annual Meeting of shareholders of Carter’s, Inc., to be held on May 7, 2015, will be incorporated by reference in Part III of this Form 10-K. Carter’s, Inc. intends to file such proxy statement with the Securities and Exchange Commission not later than 120 days after its fiscal year ended January 3, 2015. 46496_10k.pdf Page 3 CARTER’S, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED JANUARY 3, 2015 Part I Part II Part III Part IV Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2 Item 3 Item 4 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6 Item 7 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . Item 8 Item 9 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14 Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1 8 20 21 21 21 22 24 26 50 51 106 106 107 107 107 107 107 107 108 111 113 46496_10k.pdf Page 4 PART I Our market share data is based on information provided by The NPD Group, Inc. (“NPD”). Unless otherwise indicated, references to market share in this Annual Report on Form 10-K are expressed as a percentage of total children’s retail sales for a segment of the market. As the Company defines it, the baby and young children’s apparel market includes apparel and related products for ages zero to eight. The NPD market share data presented is based on NPD’s definition of the baby and playclothes categories, which are different from the Company’s definitions of these categories. The data presented is based upon The NPD Group/Consumer Tracking Service for Children’s Apparel in the United States (“U.S.”) and represents the twelve month period ending December, 2014. Unless the context indicates otherwise, in this filing on Form 10-K, “Carter’s,” the “Company,” “we,” “us,” “its,” and “our” refers to Carter’s, Inc. and its wholly owned subsidiaries. This Annual Report on Form 10-K contains certain forward-looking statements regarding future circumstances. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” and similar terms. These forward-looking statements are based upon current expectations and assumptions of the Company and are subject to various risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements including, but not limited to, those discussed in the subsection entitled “Risk Factors” under Part I, Item 1A of this Annual Report on Form 10-K. Actual results, events, and performance may differ significantly from the results discussed in the forward-looking statements. Readers of this Annual Report on Form 10-K are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except for any ongoing obligations to disclose material information as required by federal securities laws, the Company does not have any intention or obligation to update forward-looking statements after the filing of this Annual Report on Form 10-K.The inclusion of any statement in this Annual Report on Form 10-K does not constitute an admission by the Company or any other person that the events or circumstances described in such statement are material. ITEM 1. BUSINESS GENERAL We are the largest branded marketer in the United States 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”). Established in 1865, our Carter’s brand is recognized and trusted by consumers for high-quality apparel for children sizes newborn to eight. Established in 1895, OshKosh is a well-known brand, trusted by consumers for apparel for children sizes newborn to 12, with a focus on playclothes for toddlers and young children. Given each brands’ product category emphasis and brand aesthetic, we believe the brands provide a complementary product offering. We have extensive experience in the young children’s apparel market and focus on delivering products that satisfy our consumers’ needs. Our strategy is to market high-quality, essential core products at prices that deliver an attractive value proposition for consumers. We believe each of our brands has its own unique positioning in the marketplace. In the $19.7 billion baby and young children’s apparel market (ages zero to eight) in the United States, our Carter’s brand has the #1 position with a 14.3% market share and our OshKosh brand has a 2.2% market share. We offer multiple product categories, including baby, sleepwear, playclothes, and related accessories. Our multi-channel business model enables us to reach a broad range of consumers across various socio-economic groups and geographic regions. F o r m 1 0 - K 1 46496_10k.pdf Page 5 We distribute our products through multiple channels in the United States children’s apparel market, which, as of January 3, 2015, includes approximately 18,000 wholesale locations (including national department stores, chain and specialty stores, and discount retailers), 855 Company-operated stores and our websites. As of January 3, 2015, we operated 531 Carter’s and 200 OshKosh outlet, brand, and specialty stores in the United States. As of January 3, 2015, our products are sold via 124 Company-operated stores in Canada in addition to our international wholesale, licensing, and online channels. The Company is a Delaware corporation. The Company and its predecessors have been doing business since 1865. The Company’s principal executive offices are located at Phipps Tower, 3438 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326, and our telephone number is (678) 791-1000. OUR BRANDS, PRODUCTS, AND DISTRIBUTION CHANNELS CARTER’S BRANDS — United States Under our Carter’s brand, we design, source, and market a broad array of products, primarily for sizes newborn to eight. Our Carter’s brand is sold in department stores, national chains, specialty stores, off-price sales channels, through our Carter’s retail stores, and online at www.carters.com. Additionally, we sell our Child of Mine brand at Walmart and our Just One You and Precious Firsts brands at Target. In fiscal 2014, we sold over 327.7 million units of Carter’s, Child of Mine, Just One You, and Precious Firsts products in the United States, an increase of approximately 4.7% from fiscal 2013. Our strategy is to drive sales growth through our focus on essential, high-volume, core apparel products for babies and young children. Such products include bodysuits, pajamas, blanket sleepers, gowns, bibs, receiving blankets, and playwear. Our top ten core baby and sleepwear products accounted for approximately 55% of our baby and sleepwear net sales in fiscal 2014 in the United States. We believe our core apparel products are essential consumer staples and less dependent on changes in fashion trends. We have cross-functional product teams focused on the development of our Carter’s baby, sleepwear, and playclothes products. These teams are skilled in identifying and developing high-volume, core products. Each team includes members from merchandising, design, sourcing, product development, forecasting, and supply chain logistics. These teams follow a disciplined approach to fabric usage, color rationalization, and productivity and are supported by a dedicated art department and state-of-the-art design systems. We also license our brand names to other companies to create a broad collection of lifestyle products, including bedding, hosiery, shoes, room décor, furniture, and toys. The licensing team directs the use of our designs, art, and selling strategies to all licensees. We believe this disciplined approach to core product design results in compelling product offerings to consumers, reduces our exposure to short-term fashion trends, and supports efficient operations. We conduct consumer research as part of our product development process and engage in product testing in our own stores. CARTER’S BRAND POSITIONING — United States Our strategy is to drive our brand image as the leader in baby and young children’s apparel and to consistently provide high-quality products at a great value to consumers. We employ a disciplined merchandising strategy that identifies and focuses on core products. We believe that we have strengthened our brand image with the consumer by differentiating our core products through fabric improvements, new artistic applications, and new packaging and presentation strategies. We also attempt to differentiate our products through store-in-store fixturing, branding and signage packages, and advertising. We have invested in display fixtures for our major wholesale customers that more clearly present our core products on their floors to enhance brand and product presentation. We also strive to provide our wholesale customers with a consistent, high-level of service, including delivering and replenishing products on time to fulfill customer needs. Our retail stores and websites focus on the customer experience through store and website design, visual enhancements, clear product presentation, and experienced customer service. 2 46496_10k.pdf Page 6 CARTER’S PRODUCTS — United States Baby Carter’s brand baby products include bodysuits, pants, dresses, three-piece sets, receiving blankets, layette gowns, bibs, caps, and booties both as single units and multi-piece sets. In fiscal 2014, we generated approximately $1.0 billion in net sales of these products in the United States, representing 34.7% of our consolidated net sales. Our Carter’s brand is the leading brand in the baby category in the United States. In fiscal 2014, in department stores, national chains, outlet, specialty stores, and off-price sales channels, our aggregate Carter’s brand market share in the United States was approximately 25.6% for baby ages zero to two, which represents more than five times the market share of the next largest brand. We sell a complete range of baby products for newborns, primarily made of cotton. We attribute our leading market position to our brand strength, distinctive print designs, artistic applications, reputation for quality, and ability to manage our dedicated floor space for our wholesale customers. We tier our products through marketing programs targeted toward experienced mothers, first-time mothers, and gift-givers. Our Carter’s Little Layette product line, the largest component of our baby business, provides parents with essential core products and accessories, including value-focused multi-piece sets. Our Little Collections product line consists of coordinated baby programs designed for first-time mothers and gift-givers. Playclothes Carter’s brand playclothes products include knit and woven cotton apparel for everyday use in sizes newborn to eight. In fiscal 2014, we generated $680.6 million in net sales of these products in the United States, or 23.5%, of our consolidated net sales. We continue to focus on building our Carter’s brand in the playclothes market by developing a base of essential, high-volume products that utilize original print designs and innovative artistic applications. Our aggregate 2014 Carter’s brand playclothes market share in the United States was approximately 12.4% in the $13.7 billion department store, national chain, outlet, specialty store, and off-price sales channels, which represents over 1.5 times the market share of the next largest brand. Sleepwear Carter’s brand sleepwear products include pajamas and blanket sleepers primarily in sizes 12 months to eight. In fiscal 2014, we generated $331.1 million in net sales of these products in the United States, or 11.4%, of our consolidated net sales. Our Carter’s brand is the leading brand of sleepwear for babies and young children within the department store, national chain, outlet, specialty store, and off-price sales channels in the United States. In fiscal 2014, in these channels, our Carter’s brand market share was approximately 32.7%, which represents nearly five times the market share of the next largest brand. As with our baby product line, we differentiate our sleepwear products by offering high-volume, high-quality core products with distinctive print designs and artistic applications. Other Products Our other product offerings include bedding, outerwear, swimwear, shoes, socks, diaper bags, gift sets, toys, and hair accessories. In fiscal 2014, we generated $156.3 million in net sales of these other products in our Carter’s retail stores and online, or 5.4%, of our consolidated net sales. F o r m 1 0 - K 3 46496_10k.pdf Page 7 Royalty Income We currently extend our Carter’s, Child of Mine, Just One You, and Precious Firsts product offerings by licensing these brands to 20 licensees in the United States. These licensing partners develop and sell products through our multiple sales channels, while leveraging our brand strength, customer relationships, and designs. Licensed products provide our customers and consumers with a range of lifestyle products that complement and expand upon our baby and young children’s apparel offerings. Our license agreements require strict adherence to our quality and compliance standards and provide for a multi-step product approval process. We work in conjunction with our licensing partners in the development of their products to ensure that they fit within our brand vision of high-quality, core products at attractive values to the consumer. In addition, we work closely with our wholesale customers and our licensees to gain dedicated floor space for licensed product categories. In fiscal 2014, our Carter’s brand generated $22.4 million in domestic royalty income. OSHKOSH BRANDS — United States Under our OshKosh brand, we design, source, and market a broad array of young children’s apparel, primarily for children in sizes newborn to 12. Our OshKosh brand is currently sold in our OshKosh retail stores, department stores, national chains, specialty stores, through off-price sales channels, and online at www.oshkoshbgosh.com and www.oshkosh.com. In fiscal 2014, we sold approximately 47.1 million units of OshKosh products in the United States through our retail stores, to our wholesale customers, and online, an increase of approximately 7.2% from fiscal 2013. We also have a licensing agreement with Target through which Target sells products under our Genuine Kids from OshKosh brand. Given its long history of durability, quality, and style, we believe our OshKosh brand represents a significant long-term growth opportunity for us, especially in the $13.7 billion young children’s playclothes market in the United States. We continue to focus on our core product development and marketing disciplines, improving the productivity of our existing OshKosh retail stores, developing new retail formats, investing in new employees and talent development, leveraging our relationships with major wholesale accounts, and leveraging our infrastructure and supply chain. OSHKOSH BRAND POSITIONING — United States We believe our OshKosh brand provides for high-quality playclothes in sizes newborn to 12. Our core OshKosh brand products include denim, overalls, t-shirts, fleece, and other playclothes. Our OshKosh brand is generally positioned towards an older segment (young children, sizes 2 to 7) and at slightly higher average prices than our Carter’s brand. We believe our OshKosh brand has significant brand name recognition, which consumers associate with high-quality, durable, and authentic playclothes for young children. OSHKOSH PRODUCTS — United States Playclothes Our OshKosh brand is best known for its playclothes products. OshKosh brand playclothes products include denim apparel products with multiple wash treatments and coordinating garments, overalls, woven bottoms, knit tops, bodysuits, and playclothes products for everyday use in sizes newborn to 12. In fiscal 2014, we generated $333.0 million in net sales of OshKosh brand playclothes products in the United States, which accounted for approximately 11.5% of our consolidated net sales. Our aggregate 2014 OshKosh brand playclothes market share in the United States was approximately 2.6% of the $13.7 billion department store, national chain, outlet, specialty store, and off-price sales channels. We believe our OshKosh brand represents a significant opportunity for us to increase our share in the playclothes category as the $13.7 billion young children’s playclothes market in the United States is highly fragmented. For fiscal 2014, this market was nearly five times the size of the baby and sleepwear markets combined. We plan to grow this business by strengthening our product offerings, improving product value, reducing product complexity, and leveraging our strong customer relationships and global supply chain expertise. 4 46496_10k.pdf Page 8 Other Products The remainder of our OshKosh brand product offerings include baby, sleepwear, outerwear, shoes, hosiery, and accessories. In fiscal 2014, we generated $75.4 million in net sales of these other products in our OshKosh retail stores and online, which accounted for 2.6% of our consolidated net sales. Royalty Income We partner with a number of domestic licensees to extend the reach of our OshKosh brand. We currently have eight domestic licensees selling apparel and accessories. Our largest licensing agreement is with Target Corporation. All Genuine Kids from OshKosh products sold by Target are sold pursuant to this licensing agreement. Our licensed products provide our customers and consumers with a range of OshKosh products including outerwear, underwear, swimwear, socks, shoes, and accessories. In fiscal 2014, we earned approximately $10.9 million in domestic royalty income from our OshKosh brands. INTERNATIONAL Our international segment includes Company-operated retail, wholesale, and online operations in addition to royalty income from our international licensees. In fiscal 2014, our international sales were $316.5 million, or 10.9% of consolidated net sales. As of January 3, 2015, we operated 124 co-branded Carter’s and OshKosh retail stores in Canada. Additionally, we reach consumers in approximately 65 countries through wholesale and licensing relationships and in over 100 countries through our website. We partner with approximately 30 licensees to sell the Carter’s and OshKosh brands internationally. In fiscal 2014, our OshKosh international licensees generated retail sales of $57.7 million, on which we earned approximately $4.1 million in royalty income. In fiscal 2014, our international licensees generated Carter’s brand retail sales of $28.0 million on which we earned $1.8 million in royalty income. F o r m 1 0 - K SEGMENTS Business segment financial and geographical information for our five business segments, Carter’s retail, Carter’s wholesale, OshKosh retail, OshKosh wholesale, and international, is contained in Item 8-“Financial Statements and Supplementary Data,” Note 13-“Segment Information” to the accompanying audited consolidated financial statements. SALES, MARKETING AND DISTRIBUTION As described above, we sell our products through the wholesale channel, through our retail stores in the United States and Canada, and online. Our Carter’s brand wholesale customers include major retailers, such as, in alphabetical order, Costco, JCPenney, Kohl’s, Macy’s, Sam’s Club, Target, Toys “R” Us, and Walmart. We collaboratively plan store assortments with our wholesale customers. We intend to drive continued growth with our wholesale customers through our focus on managing our key accounts’ business through replenishment, product mix, brand presentation, marketing, and frequent meetings with the senior management of our major wholesale customers. Our OshKosh brand wholesale customers include major retailers, such as, in alphabetical order, Belk, Bon-Ton, Costco, Fred Meyer, JCPenney, Kohl’s, and Sears. We continue to work with our customers to establish seasonal plans. The majority of our OshKosh brand playclothes products will be planned and ordered seasonally. 5 46496_10k.pdf Page 9 As of January 3, 2015, we operated 531 Carter’s retail stores in the United States, of which 343 were brand stores and 188 were outlet stores. These stores carry a complete assortment of baby and young children’s apparel, accessories, and gift items. Our stores average approximately 4,400 square feet per location and are distinguished by an easy, consumer-friendly shopping environment. Our brand stores are generally located in high-traffic strip shopping centers in or near major cities. We believe our brand strength and our assortment of core products have made our stores a destination location within many outlet and strip centers. Our outlet stores are generally located within 20 to 30 minutes of densely-populated areas. As of January 3, 2015, we operated 200 OshKosh retail stores in the United States, of which 152 were outlet stores and 48 were brand and specialty stores. These stores carry a wide assortment of young children’s apparel, accessories and gift items, and average approximately 4,200 square feet per location. We operate “side-by-side” locations wherein adjacent retail stores for our Carter’s and OshKosh brands are connected, allowing customers to shop for both brands in a single location. Each “side-by-side” location is counted as one Carter’s retail store and one OshKosh retail store. As of January 3, 2015, we have 51 “side-by- side” locations consisting of 29 brand and specialty stores and 22 outlet stores for both Carter’s and OshKosh. As of January 3, 2015, we operated 124 co-branded retail stores in Canada. These stores average approximately 5,300 square feet per location, slightly larger than our United States based stores, and offer a similar product assortment, localized for climate differences. Store Expansion We use a real estate selection process whereby we fully assess all new locations based on demographic factors, retail adjacencies, and population density. Marketing Our strategy is to strengthen our online and direct marketing with a focus on increasing the convenience of shopping by driving higher spend and more transactions per customer, increasing purchase frequency, and increasing return on our marketing investment. Distribution We have invested in a one million square foot multi-channel distribution center in Braselton, Georgia. All of our eCommerce business demand for the United States and portions of our retail store and wholesale demand are fulfilled at the Braselton facility. GLOBAL SOURCING NETWORK We source products from an international network of suppliers, primarily from Asia. One sourcing agent currently manages approximately 70% of our inventory purchases. Our sourcing network consists of over 140 vendors located in 17 countries. We believe that our sourcing arrangements are sufficient to meet our current operating requirements and provide capacity for growth. In fiscal 2012, we established direct sourcing operations in Hong Kong. Our goal is to increase our direct sourcing mix overtime in an effort to improve the performance of our overall supply chain. 6 46496_10k.pdf Page 10 COMPETITION The baby and young children’s apparel market is highly competitive. Competition is generally based upon product quality, brand name recognition, price, selection, service, and convenience. Both branded and private label manufacturers compete in the baby and young children’s apparel market. Our primary competitors in the wholesale channel include private label product offerings, and, in alphabetical order, Disney and Gerber. Our primary competitors in the retail channel include, in alphabetical order, Disney, Gap, Gymboree, Old Navy, and The Children’s Place. Most retailers, including our wholesale customers, have significant private label product offerings that compete with our products. Because of the highly-fragmented nature of the industry, we also compete with many small manufacturers and retailers. We believe that the strength of our Carter’s, OshKosh, and related brand names, combined with our breadth of product offerings and operational expertise, position us well against these competitors. 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 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. TRADEMARKS AND COPYRIGHTS We own many trademarks and copyrights, including Carter’s®, OshKosh®, OshKosh B’gosh®, Genuine Kids®, Child of Mine®, Just One You®, Precious Firsts®, Little Collections®, Little Layette® , and Count on Carter’s®, many of which are registered in the United States and in more than 140 countries and territories. The registration of our trademarks and copyrights may be renewed to extend the original registration period indefinitely, provided the trademarks and copyrights are still in use. We intend to continue to use and protect our trademarks and copyrights and maintain their registrations. We believe our trademarks and copyrights have received broad recognition and are of significant value to our business. EMPLOYEES As of January 3, 2015, we had 11,565 employees. We have no unionized employees. We have had no labor- related work stoppages and believe that our labor relations are good. AVAILABLE INFORMATION Our Internet address is www.carters.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. On our website, we make available, free of charge, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, director and officer reports on Forms 3, 4, and 5, and any amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the investor relations section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC. We also make available on our website, the Carter’s Code of Ethics, our Corporate Governance Principles, and the charters for the Compensation, Audit, and Nominating and Corporate Governance Committees of the Board of Directors. Our SEC filings are also available for reading and copying at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site, www.sec.gov, containing reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. 7 F o r m 1 0 - K 46496_10k.pdf Page 11 ITEM 1A. RISK FACTORS You should carefully consider each of the following risk factors as well as the other information contained in this Annual Report on Form 10-K and our other filings with the SEC in evaluating our business. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impact our business operations. If any of the following risks actually occur, our operating results may be affected. The loss of one or more of our major customers could result in a material loss of revenues; financial difficulties for our major customers or licensees could have a significant impact on us. We derived approximately 25% of our consolidated net sales from our top five customers for the fiscal year ended January 3, 2015. We do not enter into long-term sales contracts with our major customers, relying instead on product performance, long-standing relationships, and on our position in the marketplace. As a result, we face the risk that one or more of these or other customers may significantly decrease their business with us or terminate their relationship with us as a result of competitive forces, consolidation, reorganization, financial difficulties, including bankruptcy or insolvency, or other reasons, which could result in significant levels of excess inventory, a material decrease in our sales, or material impact on our operating results. Further, a large percentage of our gross accounts receivables are typically from our largest wholesale customers. For example, approximately 75% of our gross accounts receivable at January 3, 2015 were from our ten largest wholesale customers, with five of these customers having individual receivable balances in excess of 10% of our gross accounts receivable. Our reserves for doubtful accounts for estimated losses resulting from the inability of our customers to make payments may prove not to be sufficient if any one or more of our customers are unable to meet outstanding obligations to us, which could materially adversely affect our operating results. If the financial condition or credit position of one or more of our customers or licensees were to deteriorate, or such customer or licensee fails, or is unable to pay the amounts owed to us in a timely manner, this could have a significant adverse impact on our business and results of operations. The acceptance of our products in the marketplace is affected by consumers’ tastes and preferences, along with fashion trends. We believe that continued success depends on our ability to provide a compelling value proposition for our consumers in the Company’s distribution channels. There can be no assurance that the demand for our products will not decline, or that we will be able to successfully and timely evaluate and adapt our products to changes in consumers’ tastes and preferences or fashion trends. If our product offerings are not aligned with consumers’ tastes and preferences demand for our products may decline, promotional pricing may be required to move seasonal merchandise, and our gross margins and results of operations could be adversely affected. The value of our brands, and our sales, could be diminished if we are associated with negative publicity, including through actions by our vendors, independent manufacturers and licensees, over whom we have limited control. Although we maintain policies with our vendors, independent manufacturers and licensees that promote ethical business practices and our employees, agents, and third-party compliance auditors periodically visit and monitor the operations of our vendors, independent manufacturers, and licensees, we do not control these vendors, independent manufacturers, and licensees, or their labor practices. A violation of our vendor policies, licensee agreements, health and safety standards, labor laws, or other laws by these vendors, independent manufacturers, or licensees could damage the image and reputation of our brands and could subject us to liability. As a result, negative publicity regarding our Company, brands or products, including licensed products, could adversely affect our reputation and sales. Further, while the Company takes steps to ensure the reputation of its brands is maintained through its license agreements, there can be no guarantee that the Company’s brand image will not be negatively impacted through its association with products or actions of licensees. In addition, we are subject to certain rules as a public company, such as the conflict minerals rules promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, that require disclosure of certain activities notwithstanding their compliance with the substantive provisions of applicable law. If we are required to make such disclosures, it is possible that our reputation could be harmed. 8 46496_10k.pdf Page 12 Our failure to protect our intellectual property rights could diminish the value of our brand, weaken our competitive position, and adversely affect our results. We currently rely on a combination of trademark, unfair competition, and copyright laws, as well as licensing arrangements, to establish and protect our intellectual property rights. The steps taken by us or by our licensees to protect our proprietary rights may not be adequate to prevent infringement of our trademarks or proprietary rights by others. In addition, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our proprietary rights and where third parties may have rights to conflicting marks, and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in those countries. If we fail to protect and maintain our intellectual property rights, the value of our brands could be diminished and our competitive position may suffer. Further, third parties may assert intellectual property claims against us, particularly as we expand our business geographically, and any such claim could be expensive and time consuming to defend, regardless of its merit. Successful infringement claims against us could result in significant monetary liability or prevent us from selling some of our products, which could have an adverse effect on our results of operations. We may incur substantial costs as a result of investigations or other proceedings related to previously disclosed investigations. As previously reported, beginning in the fourth quarter of fiscal 2009, the SEC and the United States Attorney’s Office began conducting investigations, with which the Company cooperated, related to customer margin support provided by the Company, including undisclosed margin support commitments and related matters. In December 2010, the Company and the SEC entered into a non-prosecution agreement pursuant to which the SEC agreed not to charge the Company with any violations of federal securities laws, commence any enforcement action against the Company, or require the Company to pay any financial penalties in connection with the SEC’s investigation of customer margin support provided by the Company, conditioned upon the Company’s continued cooperation with the SEC’s investigation and with any related proceedings. The Company has incurred and may continue to incur substantial expenses for legal services due to the SEC and United States Attorney’s Office investigations and any related proceedings. These matters may continue to divert management’s time and attention away from operations. The Company also expects to bear additional costs pursuant to its advancement and indemnification obligations to directors and officers under our organizational documents in connection with proceedings related to these matters. Our insurance does not provide coverage to offset all of the costs incurred in connection with these proceedings. The Company’s and its vendors’ databases containing personal information and payment card data of our retail store and eCommerce customers, employees and other third parties, could be breached, which could subject us to adverse publicity, costly government enforcement actions or private litigation, and expenses. In addition, if we are unable to comply with security standards created by banks and the payment card industry, our operations could be adversely affected. We rely on the security of our networks, databases, systems and processes and, in certain circumstances, those of third parties, such as vendors, to protect our proprietary information and information about our customers, employees, and vendors. Criminals are constantly devising schemes to circumvent information technology security safeguards and other retailers have recently suffered serious data security breaches. If unauthorized parties gain access to our networks or databases, or those of our vendors, they may be able to steal, publish, delete, or modify our private and sensitive third-party information including credit card information and personal identification information. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. In such circumstances, we could be held liable to our customers, other parties, or employees as well as be subject to regulatory or other actions for breaching privacy law or failing to adequately protect such information. This could result in costly investigations and litigation, civil or criminal penalties, operational changes or other response measures, loss of consumer confidence in our security measures, and negative publicity that could adversely affect our financial condition, results of operations, and reputation. Further, if we are unable to comply with the security standards, established by banks and the payment card industry, we may be subject to fines, restrictions, and expulsion from card acceptance programs, which could adversely affect our retail operations. 9 F o r m 1 0 - K 46496_10k.pdf Page 13 Our profitability may decline as a result of increasing pressure on margins. The apparel industry is subject to significant pricing pressure caused by many factors, including intense competition, the promotional retail environment and changes in consumer demand. If these factors cause us to reduce our sales prices and we fail to sufficiently reduce our product costs or operating expenses, our profitability could decline. This could have a material adverse effect on our results of operations, liquidity and financial condition. Increases in production costs and deflationary pressures on our selling prices may adversely affect our results. The Company’s product costs are subject to fluctuations in costs such as manufacturing, cotton, labor, fuel, and transportation. At various time in recent years, we have experienced increased costs of cotton, labor, fuel, and transportation, and have also had higher costs for foreign sourced products as a result of the devaluation of the U.S. dollar relative to certain foreign currencies. In recent years, the Company experienced deflationary pressure on its selling prices, in part driven by intense price competition in the young children’s apparel industry. If future product cost increases are more than anticipated, or if we are unable to offset such cost increases through selling price increases or otherwise, our profitability could be adversely affected. Future deflationary pressures on our selling prices could also adversely affect our profitability. Our business is sensitive to overall levels of consumer spending, particularly in the young children’s apparel segment. Consumers’ demand for young children’s apparel, specifically brand name apparel products, is impacted by the overall level of consumer spending. Discretionary consumer spending is impacted by employment levels, weather, gasoline and utility costs, business conditions, availability of consumer credit, tax rates, interest rates, levels of consumer indebtedness, and overall levels of consumer confidence. Recent and further reductions, or lower-than-expected growth, in the level of discretionary spending may have a material adverse effect on the Company’s sales and results of operations. We source substantially all of our products through foreign production arrangements. Our dependence on foreign supply sources are subject to risks associated with global sourcing and manufacturing which could result in disruptions to our operations. We source substantially all of our products through a network of vendors primarily in Asia, principally coordinated by our sourcing agents and directly through our Hong Kong sourcing office. The following factors could disrupt our foreign supply chain, increase our cost of goods sold, decrease our gross profit, or impact our ability to get products to our customers: • • • • • • financial instability, including bankruptcy or insolvency, of one or more of our major vendors; political instability or other international events resulting in the disruption of trade in foreign countries from which we source our products; interruptions in the supply of raw materials, including cotton, fabric, and trim items; increases in the cost of labor in our sourcing locations; the imposition of new regulations relating to imports, duties, taxes, and other charges on imports; the occurrence of a natural disaster, unusual weather conditions, or a disease epidemic in foreign countries from which we source our products; 10 46496_10k.pdf Page 14 • • • • • • • • • changes in the United States customs procedures concerning the importation of apparel products; unforeseen delays in customs clearance of any goods; disruptions in the global transportation network such as a port strike, work stoppages or other labor unrest, capacity withholding, world trade restrictions, acts of terrorism or war; the application of adverse foreign intellectual property laws; the ability of our vendors to secure sufficient credit to finance the manufacturing process including the acquisition of raw materials; potential social compliance concerns resulting from our use of international vendors, independent manufacturers and licensees, over whom we have limited control; manufacturing delays or unexpected demand for products may require the use of faster, but more expensive, transportation methods such as air-freight services; compliance with disclosure rules regarding the identification and reporting on the use of “conflict minerals” sourced from the Democratic Republic of the Congo in our products; and other events beyond our control that could interrupt our supply chain and delay receipt of our products into the United States. Our revenues, product costs and other expenses are subject to foreign economic and currency risks due to our operations outside of the United States. We have operations in Canada and our vendors, independent manufacturers, and licensees are located around the world. The value of the U.S. dollar against other foreign currencies has seen significant volatility recently. While our business is primarily conducted in U.S. dollars, we source virtually all of our production overseas, and we generate significant revenues in Canada. Cost increases caused by currency exchange rate fluctuations could make our products less competitive or have a material adverse effect on our profitability. Currency exchange rate fluctuations could also disrupt the business of our independent manufacturers that produce our products by making their purchases of raw materials or products more expensive and more difficult to finance. Additionally, fluctuations in exchange rates impact the amount of our reported sales and expenses, which could have a material adverse effect on our financial position, results of operations, and cash flows. A small number of vendors supply a significant amount of our products, and losing one or more of these vendors could have a material adverse effect on our business, results of operations, and financial condition. In fiscal 2014, we purchased approximately 60% of our products from ten vendors, of which approximately half comes from three vendors. We expect that we will continue to source a significant portion of our products from these vendors. We do not have agreements with our major vendors that would provide us with assurances on a long-term basis as to adequate supply or pricing of our products. If any of our major vendors (i) decide to discontinue or significantly decrease the volume of products they manufacture for us, (ii) raise prices on products we purchase from them, or (iii) become unable to perform their responsibilities (e.g., if our vendors experience financial difficulties, lack of capacity or significant labor disputes) our business, results of operations, and financial condition may be adversely affected. F o r m 1 0 - K 11 46496_10k.pdf Page 15 We currently source a significant portion of our products through a single port. Labor disruptions at that port or otherwise along our supply chain may adversely affect our relationships with customers, reputation with consumers, and results of operations. Our business depends on our ability to source and distribute products in a timely manner. Labor disputes at independent factories where our goods are produced, the shipping ports we use, or our transportation carriers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or other disruptions during our peak manufacturing and importing times. The existing labor agreement between the Pacific Maritime Association (“PMA”), which represents operators of West Coast ports including the port through which we source a significant portion of our products, and the International Longshore and Warehouse Union, expired on July 1, 2014, and the parties recently reached a tentative labor agreement that must be ratified by union employees and the PMA. The negotiations led to work slowdowns and stoppages, which resulted in a significant backlog of cargo containers at West Coast ports. We have experienced delays in the shipment of our products as a result of this backlog, and we have not been able to meet our planned inventory allocations. In the event that these slow-downs continue or expand, disruptions or a strike occurs in connection with the labor agreement negotiations or otherwise, it may have a material adverse effect on our financial position, results of operations, and cash flows. We source substantially all of our products through a network of vendors. We have limited control over these vendors and we may experience delays, product recalls, or loss of revenues if our products do not meet our quality standards. Our vendors may not continue to provide products that are consistent with our standards. We have occasionally received, and may in the future continue to receive, shipments of product that fail to conform to our quality control standards. A failure in our quality control program may result in diminished product quality, which in turn may result in increased order cancellations and returns, decreased consumer demand for our products, or product recalls, any of which may have a material adverse effect on our results of operations and financial condition. Because we do not control our vendors, products that fail to meet our standards, or other unauthorized products, could end up in the marketplace without our knowledge. This could materially harm our brand and our reputation in the marketplace. We may experience delays, product recalls, or loss of revenues if our products do not meet regulatory requirements. Our products are subject to regulation of and regulatory standards with respect to quality and safety set by various governmental authorities around the world, including the U.S. Consumer Product Safety Commission and Health Canada. These regulations and standards may change from time to time. Our inability, or that of our vendors, to comply on a timely basis with regulatory requirements could result in significant fines or penalties, which could adversely affect our reputation and sales. Issues with the compliance of merchandise we sell with these regulations and standards, regardless of our culpability, or customer concerns about such issues, could result in damage to our reputation, lost sales, uninsured product liability claims or losses, merchandise recalls, and increased costs. 12 46496_10k.pdf Page 16 The loss of a sourcing agent or our inability to effectively source inventory directly could negatively impact our ability to timely deliver our inventory supply and disrupt our business, which may adversely affect our operating results. Currently, one sourcing agent manages approximately 70% of our inventory purchases. Although we believe that other buying agents could be retained, or that we could procure some of the inventory directly, the loss of this buying agent could delay our ability to timely receive inventory supply and disrupt our business, which could result in a material adverse effect on our operating results. In addition, we source a significant amount of inventory directly and plan to continue to further increase such amounts. If we experience significant increases in demand or need to replace an existing vendor, there can be no assurance that additional manufacturing capacity will be available when required on terms that are acceptable to us or that any vendor would allocate sufficient capacity to us in order to meet our requirements. In addition, for any new vendors, we may encounter delays in production and added costs as a result of the time it takes to train our vendors in producing our products and adhering to our quality control standards. Moreover, in the event of a significant disruption in the supply of the fabrics or raw materials used by our vendors in the manufacture of our products, our vendors might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price. Any delays, interruption, or increased costs in the manufacture of our products could have a material adverse effect on our operating results. We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of market share and, as a result, a decrease in revenue and gross profit. The baby and young children’s apparel market is highly competitive. Both branded and private label manufacturers compete in the baby and young children’s apparel market. Our primary competitors in our wholesale businesses include private label product offerings and Disney and Gerber. Our primary competitors in the retail store channel include, in alphabetical order, Disney, Gap, Gymboree, Old Navy, and The Children’s Place. Because of the fragmented nature of the industry, we also compete with many other manufacturers and retailers. Some of our competitors have greater financial resources and larger customer bases than we have. As a result, these competitors may be able to: F o r m 1 0 - K • • • • adapt to changes in customer requirements more quickly; take advantage of acquisition and other opportunities more readily; devote greater resources to the marketing and sale of their products; and adopt more aggressive pricing strategies than we can. The Company’s retail success and future growth is dependent upon identifying locations and negotiating appropriate lease terms for retail stores. A significant portion of our revenues are through the Company’s retail stores in leased retail locations across the United States and Canada. Successful operation of a retail store depends, in part, on the overall ability of the retail location to attract a consumer base sufficient to make store sales volume profitable. If we are unable to identify new retail locations with consumer traffic sufficient to support a profitable sales level, our retail growth may be limited. Further, if existing stores do not maintain a sufficient customer base that provides a reasonable sales volume or we are unable to negotiate appropriate lease terms for the retail stores, there could be a material adverse impact on our sales, gross margin, and results of operations. We also must be able to effectively renew our existing store leases on acceptable terms. In addition, from time to time, we may seek to downsize, consolidate, reposition, or close some of our real estate locations, which in most cases requires a modification of an existing store lease. Failure to renew existing store leases, secure adequate new locations or successfully modify existing locations, or failure to effectively manage the profitability of our existing fleet of stores, could have a material adverse effect on our results of operations. 13 46496_10k.pdf Page 17 Additionally, the economic environment may at times make it difficult to determine the fair market rent of real estate properties within the United States and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and the quality of our decisions to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores and could have a material adverse effect on our results of operations. Our eCommerce business faces distinct risks, and our failure to successfully manage it could have a negative impact on our profitability. The successful operation of our eCommerce business as well as our ability to provide a positive shopping experience that will generate orders and drive subsequent visits depends on efficient and uninterrupted operation of our order-taking and fulfillment operations. Risks associated with our eCommerce business include: • • • • • • • • • • risks associated with the failure of the computer systems that operate our website including, among others, inadequate system capacity, computer viruses, human error, changes in programming, security breaches, system upgrades or migration of these services to new systems; disruptions in telephone service or power outages; reliance on third parties for computer hardware and software, as well as delivery of merchandise to our customers; rapid technology changes; credit or debit card fraud; the diversion of sales from our physical stores; natural disasters or adverse weather conditions; changes in applicable federal, state and international regulations; liability for online content; and consumer privacy concerns and regulation. Problems in any of these areas could result in a reduction in sales, increased costs and damage to our reputation and brands, which could adversely affect our business and results of operations. Profitability and our reputation and relationships could be negatively impacted if we do not adequately forecast the demand for our products and, as a result, create significant levels of excess inventory or insufficient levels of inventory. If we do not adequately forecast demand for our products and purchases inventory to support an inaccurate forecast, we could experience increased costs and lower selling prices due to the need to dispose of excess inventory. In addition, if we forecast demand for our products that is lower than actual demand, we may experience insufficient levels of inventory, which could result in damage to our relationships with customers and our reputation with consumers. 14 46496_10k.pdf Page 18 We may not achieve sales growth plans, cost savings, and other assumptions that support the carrying value of our intangible assets. The carrying value of our goodwill, tradename assets, and brands are subject to annual impairment reviews as of the last day of each fiscal year or more frequently, if deemed necessary, due to any significant events or changes in circumstances. Estimated future cash flows used in these impairment reviews could be negatively impacted if we do not achieve our sales plans, planned cost savings, and other assumptions that support the carrying value of these intangible assets, which could result in impairment of the remaining asset values. Any material impairment would adversely affect our results of operations. We have substantial debt, which could adversely affect our financial health and our ability to obtain financing in the future and to react to changes in our business. As of January 3, 2015, we had approximately $586.0 million aggregate principal amount of debt outstanding (excluding approximately $6.5 million of outstanding letters of credit), and approximately $182.5 million of undrawn availability under our senior secured revolving credit facility after giving effect to $6.5 million of letters of credit issued under our senior secured revolving credit facility. Our substantial debt could have significant consequences. Because of our substantial debt: • • • • • • • • • • our ability to satisfy our obligations with respect to our debt may be adversely affected; we may be more vulnerable to adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings are at variable rates of interest; we may be unable to make strategic acquisitions or be required to make non-strategic divestitures; our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements, or general corporate or other purposes may be limited; a significant portion of our cash flow from operations may have to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use that cash flow to fund our operations, capital expenditures, and future business opportunities; it may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on and acceleration of such debt; we may be at a competitive disadvantage compared to our competitors who have less debt or comparable debt at more favorable interest rates and who, as a result, may be better positioned to withstand economic downturns or to finance capital expenditures or acquisitions; our costs of borrowing may increase; we may be unable to renew or refinance our debt on terms as favorable as our existing debt or at all; and our flexibility to adjust to changing market conditions and our ability to withstand competitive pressures could be limited, or we may be prevented from carrying out capital spending that is necessary or important to our growth strategy and efforts to improve the operating margins of our businesses. F o r m 1 0 - K 15 46496_10k.pdf Page 19 We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-to-day operations or to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations and other cash requirements, we could be forced to reduce or delay investments and capital expenditures or to sell assets or operations, seek additional capital, or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our secured revolving credit facility and the indenture governing the senior notes restrict our ability and the ability of our restricted subsidiaries to dispose of assets and use the proceeds from any such dispositions and also restrict our and our restricted subsidiaries’ ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, could materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations. If we cannot make scheduled payments on our debt, we could be in default and, as a result, lenders under the secured revolving credit facility could terminate their commitments to loan money and accelerate the maturity of borrowings thereunder, our secured lenders could foreclose against the assets securing such borrowings the holders of our senior notes could accelerate the maturity of our obligations thereunder, and we could be forced into bankruptcy or liquidation. The terms of our secured revolving credit facility and the indenture governing the senior notes contain restrictions and limitations that could significantly impact our management’s flexibility or our financial and operational flexibility to operate our business. Our secured revolving credit facility contains certain restrictive covenants that, among other things, restricts our subsidiary, The William Carter Company (“TWCC”), and certain of its subsidiaries’ ability to: • • • • • • • • • incur, assume or guarantee additional indebtedness; issue disqualified stock and preferred stock; pay dividends or make distributions or other restricted payments; redeem or repurchase capital stock; prepay, redeem or repurchase certain debt; make loans and investments (including joint ventures); incur liens; make dividends, loans or asset transfers from TWCC’s subsidiaries; sell or otherwise dispose of assets, including capital stock of subsidiaries; 16 46496_10k.pdf Page 20 • • • • • consolidate or merge with or into, or sell substantially all of TWCC’s assets to, another person; designate subsidiaries as unrestricted subsidiaries; enter into sale and leaseback transactions; enter into transactions with affiliates; and enter into new lines of business. In addition, our secured revolving credit facility requires us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure that we will meet them. The indenture governing the senior notes contains certain restrictive covenants that, among other things, restrict TWCC and certain of its subsidiaries’ ability to: • • • • • • • • • incur, assume or guarantee additional indebtedness; pay dividends or make distributions or other restricted payments; make loans and investments (including joint ventures); incur liens; sell or otherwise dispose of assets, including capital stock of subsidiaries; create restrictions on the payment of dividends or other amounts to TWCC or TWCC’s subsidiaries that are guarantors of the senior notes from certain subsidiaries that are not guarantors of the senior notes; consolidate or merge with or into, or sell substantially all of TWCC’s assets to, another person; designate subsidiaries as unrestricted subsidiaries; and enter into transactions with affiliates. The restrictions in the indenture that govern the senior notes as well as those under our secured revolving credit facility may limit our ability to engage in acts that may be in our long-term best interests, and may make it difficult for us to execute our business strategy successfully or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. A breach of the covenants under the indenture that governs the senior notes or under the secured revolving credit facility could result in an event of default under the applicable indebtedness. Such default may allow the holders to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the secured revolving credit facility could permit the lenders under the secured revolving credit facility to terminate all commitments to extend further credit under that facility. If our operating performance declines, we may need to seek waivers from the holders of our indebtedness to avoid being in default under the instruments governing such indebtedness. If we breach our covenants under our indebtedness, we may not be able to obtain a waiver from the holders of such indebtedness on terms acceptable to us or at all. If this occurs, we could be in default under such indebtedness, and the holders of such indebtedness and other lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. 17 F o r m 1 0 - K 46496_10k.pdf Page 21 Furthermore, if we were unable to repay the amounts due and payable under our senior secured revolving credit facility, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or holders of senior notes accelerate the repayment of our borrowings, we cannot assure that we would have sufficient assets to repay such indebtedness. The Company’s success is dependent upon retaining key individuals within the organization to execute the Company’s strategic plan. The Company’s ability to attract and retain qualified executive management, marketing, merchandising, design, sourcing, operations, and support function staffing is key to the Company’s success. If the Company is unable to attract and retain qualified individuals in these areas, this may result in an adverse impact on the Company’s growth and results of operations. Our inability to retain personnel could cause us to experience business disruption due to a loss of historical knowledge and a lack of business continuity and may adversely affect our results of operations, financial position, and cash flows. Our failure to properly manage strategic projects in order to achieve our objectives may negatively impact our business. The implementation of our business strategy periodically involves the execution of complex projects, which could place significant demands on our accounting, financial, information and other systems and on our business overall. Our ability to successfully implement such projects is dependent on management’s ability to manage these projects effectively and implement them successfully. If we miscalculate the resources or time we need to complete a project or fail to implement the project effectively, our business and operating results could be adversely affected. Failure to implement new information technology systems or needed upgrades to our systems, including operational and financial systems, could adversely affect our business. As our business grows in size, complexity, and geography, we expect our information technology infrastructure to be in regular need of enhancement and upgrades. Failure to implement new systems or upgrade systems, including operation and financial systems, as needed or complications encountered in implementing new systems or upgrading existing systems could cause disruptions that may adversely affect our business results or operations. Further, additional investment needed to upgrade and expand our information technology infrastructure will require significant investment of additional resources and capital. Our Braselton, Georgia distribution facility handles a large portion of our merchandise distribution. If we encounter problems with this facility, our ability to deliver our products to the market could be adversely affected. We handle a large portion of our merchandise distribution for all of our stores, including our online retail operations, from a single facility in Braselton, Georgia. Our ability to meet consumer expectations manage inventory, complete sales, and achieve objectives for operating efficiencies depends on proper operation of this facility. If we are not able to distribute merchandise to our stores or customers because we have exceeded our capacity at the distribution facility (such as due to a high level of demand during peak periods) or because of natural disasters, accidents, system failures, disruptions or other events, our sales could decline, which may have a materially adverse effect on our earnings, financial position and our reputation. In addition, we use an automated system that manages the order processing for our eCommerce business. In the event that this system becomes inoperable for any reason, we may be unable to ship direct-to-consumer orders in a timely manner, and as a result, we could experience a reduction in our direct-to- consumer business, which could negatively impact our sales and profitability. 18 46496_10k.pdf Page 22 We may be unsuccessful in expanding into international markets. We cannot be sure that we can successfully complete any planned international expansion or that new international business will be profitable or meet our expectations. We do not have significant experience operating in markets outside of the United States and Canada. Consumer demand, behavior, tastes, and purchasing trends may differ in international markets and, as a result, sales of our products may not be successful or meet our expectations, or the margins on those sales may not be in line with those we currently anticipate. We may encounter differences in business culture and the legal environment that may make working with commercial partners and hiring and retaining an adequate employee base more challenging. We may also face difficulties integrating foreign business operations with our current operations. Any of these challenges could hinder our success in new markets. Our entry into new markets may have upfront investment costs that may not be accompanied by sufficient revenues to achieve typical or expected operational and financial performance and such costs may be greater than expected. If our international expansion plans are unsuccessful, our results could be materially adversely affected. Our results of operations, financial position, and cash flows, and our ability to conduct business in international markets may be affected by legal, regulatory, political, and economic risks. Our ability to conduct business in new and existing international markets is subject to legal, regulatory, political, and economic risks. These include: • • • • the burdens of complying with foreign laws and regulations, including trade and labor restrictions; compliance with U.S. and other countries’ laws relating to foreign operations, including the Foreign Corrupt Practices Act, which prohibits U.S. companies from making improper payments to foreign officials for the purpose of obtaining or retaining business; F o r m 1 0 - K unexpected changes in regulatory requirements; and new tariffs or other barriers in some international markets. We are also subject to general political and economic risks in connection with our international operations, including: • • • • • political instability and terrorist attacks; differences in business culture; different laws governing relationships with employees and business partners; changes in diplomatic and trade relationships; and general economic fluctuations in specific countries or markets. We cannot predict whether quotas, duties, taxes, or other similar restrictions will be imposed by the United States or foreign countries upon the import or export of our products in the future, or what effect any of these actions would have, if any, on our business, financial condition, or results of operations. Changes in regulatory, geopolitical, social or economic policies, and other factors may have a material adverse effect on our business in the future or may require us to exit a particular market or significantly modify our current business practices. 19 46496_10k.pdf Page 23 We may experience fluctuations in our tax obligations and effective tax rate. We are subject to income taxes in federal and applicable state and local tax jurisdictions in the United States, Canada, and other foreign jurisdictions. We record tax expense based on our estimates of current and future payments, which include reserves for estimates of uncertain tax positions. At any time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may impact the ultimate settlement of these tax positions. As a result, there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are re-evaluated. Further, our effective tax rate in any financial statement period may be materially impacted by changes in the mix and level of earnings. The Company’s future success and growth through expansion of its international operations could be adversely affected by violations of the United States Foreign Corrupt Practices Act and similar world-wide anti-bribery laws. The United States Foreign Corrupt Practices Act, and similar world-wide anti-bribery laws, prohibit companies and their intermediaries from making improper payments to non-United States officials for the purpose of obtaining or retaining business. The Company’s policies mandate compliance with anti-bribery laws. Our internal control policies and procedures, or those of our vendors, may not adequately protect us from reckless or criminal acts committed by the Company’s employees, agents, or vendors. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on the Company’s financial condition, results of operations, and cash flows. The Company is subject to various claims and pending or threatened lawsuits, and, as a result, may incur substantial costs that adversely affect the Company’s business, financial condition and results of operations. The Company is subject to various claims and pending or threatened lawsuits in the course of its business. In the event we are required or determine to pay amounts in connection with any such lawsuits, such amounts could be significant and could have a material adverse impact on our business, financial condition and results of operations. Failure to continue to pay quarterly cash dividends to our shareholders could cause the market price for our common stock to decline. In 2013, we initiated a quarterly cash dividend. Future declarations of quarterly cash dividends and the establishment of future record and payment dates are at the discretion of our Board of Directors based on a number of factors, including our future financial performance and other investment priorities. Additionally, provisions in our senior credit facility and the indenture governing our senior notes could have the effect of restricting our ability to pay future cash dividends on, or make future repurchases of, our common stock. Any reduction or discontinuance by us of the payment of quarterly cash dividends could cause the market price of our common stock to decline. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 20 46496_10k.pdf Page 24 ITEM 2. PROPERTIES We utilize space for retail stores, showrooms, distribution centers, and offices, principally in the United States and Canada. The majority of our premises are leased. The following sets forth information with respect to our key properties: Location Braselton, Georgia . . . . . . . . . . . . . . . . . Stockbridge, Georgia . . . . . . . . . . . . . . . Chino, California . . . . . . . . . . . . . . . . . . . Phipps Tower, Atlanta, Georgia . . . . . . . Griffin, Georgia . . . . . . . . . . . . . . . . . . . . Approx. floor space in square feet 1,062,000 505,000 413,000 275,000 224,000 Cambridge, Ontario . . . . . . . . . . . . . . . . . Cambridge, Ontario . . . . . . . . . . . . . . . . . 277,000 37,000 Fayetteville, Georgia . . . . . . . . . . . . . . . . 30,000 Principal use Distribution/warehousing Distribution/warehousing Distribution/warehousing (1) Corporate headquarters (2) Finance/information technology/rework Distribution/warehousing Canadian corporate offices/ distribution/warehousing Information technology Lease expiration date September 2026 April 2018 July 2015 April 2030 Owned March 2020 June 2021 September 2020 (1) This space is leased and operated by a third party service provider. (2) The amount of space occupied will increase to approximately 292,000 square feet by May 2015. At January 3, 2015, we operated 731 leased retail stores across the United States. In addition, we operated 124 leased retail stores in Canada. The majority of our lease terms range between 5 and 10 years. ITEM 3. LEGAL PROCEEDINGS We are subject to various claims and pending or threatened lawsuits in the normal course of our business. The Company is not currently a party to any legal proceedings that it believes would have a material adverse effect on our financial position, results of operations, or cash flows. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. F o r m 1 0 - K 21 46496_10k.pdf Page 25 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock trades on the New York Stock Exchange under the symbol CRI. The last reported sale price per share of our common stock on February 20, 2015 was $82.02. On that date there were approximately 196 holders of record of our common stock. The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported by the New York Stock Exchange: 2014 High Low First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77.97 $ 79.36 $ 83.52 $ 87.31 $ 64.84 67.83 67.94 75.10 2013 High Low First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60.84 $ 74.07 $ 77.33 $ 76.87 $ 55.55 56.84 68.02 68.00 SHARE REPURCHASES The following table provides information about shares repurchased through our repurchase program described below during the fourth fiscal quarter of 2014: Period Total number of shares purchased (1) Average price paid per share Total number of shares purchased as part of publicly announced plans or programs (2) Approximate dollar value of shares that may yet be purchased under the plans or programs September 28, 2014 through October 25, 2014 . . . . . . . 78,900 $ 78.54 78,900 $ 198,268,491 October 26, 2014 through November 29, 2014 . . . . . . . 122,061 $ 78.39 121,100 $ 188,776,047 November 30, 2014 through January 3, 2015 . . . . . . . . 44,800 $ 81.23 44,800 $ 185,136,985 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,761 244,800 (1) Includes shares of our common stock surrendered by our employees to satisfy required tax withholding upon the vesting of restricted stock awards. There were 961 shares surrendered between September 28, 2014 and January 3, 2015. (2) Amounts purchased during the fiscal year were made in accordance with the share repurchase authorizations described in Note 8 to our accompanying audited condensed consolidated financial statements. 22 46496_10k.pdf Page 26 Repurchase Program In the second quarter of fiscal 2013, our Board of Directors authorized the repurchase of shares in an amount up to $300 million, inclusive of amounts remaining under previous authorizations. In the third quarter of 2013, our Board of Directors approved an additional $400 million share repurchase authorization. The total remaining capacity under the repurchase authorizations as of January 3, 2015, was approximately $185.1 million. The authorizations have no expiration date. Open Market Purchases During the fiscal year ended January 3, 2015, we repurchased and retired 1,111,899 shares with an average share price of $73.84 for an aggregate cost of $82.1 million, in open market transactions. Accelerated Stock Repurchase Program On August 29, 2013, we entered into two fixed dollar uncollared accelerated stock repurchase (ASR) agreements totaling $400 million. The ASR agreements were settled in January 2014. As of the date of settlement, we had received a total of approximately 5.6 million shares. All shares received under the ASR Agreements were retired upon receipt. DIVIDENDS On February 18, 2015, the Company’s Board of Directors authorized a quarterly cash dividend payment of $0.22 per common share, payable on March 20, 2015 to shareholders of record at the close of business on March 10, 2015. In fiscal 2014, the Company paid quarterly cash dividends of $0.19 per share each quarter. In fiscal 2013, the Company paid quarterly cash dividends of $0.16 per share in the fiscal second, third and fourth quarters. Future declarations of quarterly dividends and the establishment of future record and payment dates are at the discretion of our Board of Directors based on a number of factors, including our future financial performance and other investment priorities. Provisions in our secured revolving credit facility and indenture governing our senior notes could have the effect of restricting our ability to pay future cash dividends on or make future repurchases of our common stock. For more information concerning these dividend restrictions, refer to the “Financial Condition, Capital Resources, and Liquidity” section of Item 7 in this Annual Report on Form 10-K. RECENT SALES OF UNREGISTERED SECURITIES Not applicable. F o r m 1 0 - K 23 46496_10k.pdf Page 27 ITEM 6. SELECTED FINANCIAL DATA The following selected financial and other data has been derived from our consolidated financial statements for each of the five years presented. The following information should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data,” which includes the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K, or the respective prior fiscal years’ Form 10-K. The Company’s fiscal year ends on the Saturday, in December or January, nearest the last day of December, resulting in an additional week of results every five or six years. All fiscal years for which financial information is set forth below contained 52 weeks, except for the fiscal year ended January 3, 2015, which includes 53 weeks. (dollars in thousands, except per share data) January 3, 2015 December 28, 2013 December 29, 2012 December 31, 2011 January 1, 2011 For the fiscal years ended Operating Data: Retail sales - Carter’s . . . . . . . . . . . . . . . $ 1,087,165 $ 954,160 $ 818,909 $ 671,590 $ 546,233 Wholesale sales - Carter’s . . . . . . . . . . . 1,081,888 1,035,420 Retail sales - OshKosh . . . . . . . . . . . . . . 335,140 Wholesale sales - OshKosh . . . . . . . . . . 73,201 International . . . . . . . . . . . . . . . . . . . . . . 316,474 289,311 74,564 285,256 981,445 283,343 79,752 218,285 939,115 280,900 81,888 136,241 827,815 264,887 75,484 34,837 Total net sales . . . . . . . . . . . . . . . . . . $ 2,893,868 $ 2,638,711 $ 2,381,734 $ 2,109,734 $ 1,749,256 Gross profit (a) . . . . . . . . . . . . . . . . . . . . $ 1,184,440 $ 1,095,379 $ 937,948 $ 692,278 $ 674,717 Operating income (b) . . . . . . . . . . . . . . . $ 333,345 $ 264,151 $ 261,986 $ 187,466 $ 243,256 Income before income taxes . . . . . . . . . $ 302,906 $ 249,465 $ 255,391 $ 180,888 $ 233,386 Net income . . . . . . . . . . . . . . . . . . . . . . . $ 194,670 $ 160,407 $ 161,150 $ 114,016 $ 146,472 Per Common Share Data: Basic net income . . . . . . . . . . . . . . . . . . $ Diluted net income . . . . . . . . . . . . . . . . . $ 3.65 $ 3.62 $ 2.78 $ 2.75 $ 2.73 $ 2.69 $ 1.96 $ 1.94 $ 2.50 2.46 Balance Sheet Data: Working capital (c) . . . . . . . . . . . . . . . . $ 793,487 $ 701,242 $ 713,468 $ 629,394 $ 532,891 Total assets . . . . . . . . . . . . . . . . . . . . . . $ 1,893,096 $ 1,812,484 $ 1,630,109 $ 1,402,709 $ 1,257,182 Total debt, including current maturities . . . . . . . . . . . . . . . . . . . . . . $ 586,000 $ 586,000 $ 186,000 $ 236,000 $ 236,000 Stockholders’ equity . . . . . . . . . . . . . . . $ 786,684 $ 700,731 $ 985,479 $ 805,709 $ 679,936 Cash Flow Data: Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . $ 282,397 $ 209,696 $ 278,619 $ 81,074 $ Net cash used in investing activities . . . $ 104,732 $ 220,532 $ 83,392 $ 106,692 $ 85,821 39,496 Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . $ (122,438) $ (84,658) $ (46,317) $ 11,505 $ (133,984) Other Data: Capital expenditures . . . . . . . . . . . . . . . $ 103,453 $ 182,525 $ 83,398 $ 45,495 $ 39,782 Dividend declared and paid per common share . . . . . . . . . . . . . . . . . . $ 0.76 $ 0.48 $ — $ — $ — 24 46496_10k.pdf Page 28 NOTES TO SELECTED FINANCIAL DATA (a) Gross profit in fiscal 2014 reflects a favorable recovery on inventory of approximately $1.0 million associated with the Company’s exit from retail operations in Japan. Gross profit in fiscal 2013 includes a charge of $1.1 million for the fiscal year ended December 28, 2013, related to inventory write-downs associated with the Company’s exit from retail operations in Japan. Gross profit in fiscal 2011 includes $6.7 million in additional expenses related to the amortization of the fair value step-up of inventory acquired as a result of the acquisition of our former licensee, Bonnie Togs, in 2011. (b) The following selling, general, & administrative expenses were included in the calculation of operating income: (dollars in thousands) Amortization of H.W. Carter and Sons tradenames . . . . . . . . . . Workforce reduction, facility write-down, and closure costs . . . . . Revaluation of contingent consideration . . . . . . . . Acquisition-related charges . . . . . . . . . . . . . $ $ $ $ For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 December 31, 2011 January 1, 2011 — $ — $ — 16,437 $ 13,588 9,126 1,348 $ $ 38,214 2,825 $ $ $ 9,490 3,589 $ $ — 2,484 — $ — $ — $ 3,050 F o r m 1 0 - K — — — (c) Represents total current assets less total current liabilities. 25 46496_10k.pdf Page 29 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 in the “Risk Factors” in 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. Fiscal Year Our fiscal year ends on the Saturday, in December or January nearest the last day of December, resulting in an additional week of results every five or six years. Fiscal 2014, which ended on January 3, 2015, contained 53 weeks. Fiscal 2013 and fiscal 2012, which ended on December 28, 2013 and December 29, 2012 respectively, each contained 52 weeks. The 53rd week in fiscal 2014 contributed approximately $44.1 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 incremental revenue was comparable to our consolidated gross margin for all of fiscal 2014. Our Business We are the largest branded marketer in the United States (“U.S.”) 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 (“OshKosh”). Established in 1865, our Carter’s brand is recognized and trusted by consumers for high-quality apparel for children sizes newborn to eight. Established in 1895, OshKosh is a well-known brand, trusted by consumers for its line of apparel for children sizes newborn to 12, with a focus on playclothes for toddlers and young children. Given each brand’s product category emphasis and brand aesthetic, we believe the brands provide a complementary product offering. We have extensive experience in the young children’s apparel market and focus on delivering products that satisfy our consumers’ needs. Our strategy is to market high-quality, essential core products at prices that deliver an attractive value proposition for consumers. In the U.S., our brands compete in the $19.7 billion children’s apparel market, for children ages zero to eight. In 2014, our Carter’s brand was the largest brand with a 14.3% market share and our OshKosh brand had a 2.2% market share. We offer multiple product categories, including baby, sleepwear, playclothes, and related accessories. Our distribution strategy enables us to reach a broad range of consumers across various channels, socio-economic groups, and geographic regions. We distribute our products through multiple channels of distribution in the U.S. children’s apparel market, which, as of January 3, 2015, includes approximately 18,000 wholesale locations (including national department stores, chain and specialty stores, and discount retailers), 855 Company-operated stores, and our websites. As of January 3, 2015, we operated 531 Carter’s and 200 OshKosh stores in the U.S. As of January 3, 2015, our products were sold via 124 Company-operated stores in Canada in addition to our international wholesale, licensing, and online channels. 26 46496_10k.pdf Page 30 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In recent years, we began opening “side-by-side” locations where adjacent retail stores for our Carter’s and Oshkosh brands are connected, allowing retail customers to shop for both brands in a single location. As of January 3, 2015, the U.S. store count data presented in the preceding paragraph includes 51 such “side-by-side” locations for both Carter’s and OshKosh. Recent Events Pursuant to the previously announced share repurchase plan authorized by our Board of Directors, during fiscal 2014 we repurchased and retired approximately 1.1 million of our common shares for $82.1 million, at an average price of $73.84 per share. Of the shares repurchased and retired in fiscal 2014, a total of 244,800 shares were repurchased and retired in the fourth quarter for $19.3 million, at an average price of $78.96 per share. In the fourth quarter of fiscal 2014, we acquired the exclusive rights to use the Carter’s tradename in Chile. The total cash consideration paid for these rights was approximately $3.6 million. We completed the wind down of our retail operations in Japan in fiscal 2014, and recorded closing related costs of approximately $0.5 million in fiscal 2014 and $4.1 million in fiscal 2013. In December 2014, we sold our Hogansville, Georgia distribution center for $2.1 million, which approximated the carrying value of the facility. The decision to close this facility was made in 2012 in conjunction with the opening of our one million square foot multi-channel distribution facility in Braselton, Georgia. Segments The five business segments we use to manage and evaluate our performance are: Carter’s retail, Carter’s wholesale, OshKosh retail, OshKosh wholesale, and International. F o r m 1 0 - K 27 46496_10k.pdf Page 31 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, (i) selected statement of operations data expressed as a percentage of net sales and (ii) the number of retail stores open at the end of each period: For the fiscal years ended January 3, 2015 (53 weeks) December 28, 2013 (52 weeks) December 29, 2012 (52 weeks) Net sales Carter’s Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carter’s Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . Total Carter’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . OshKosh Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OshKosh Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . Total OshKosh . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated net sales . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general, and administrative expenses . . . . . Royalty income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense, net Income before income taxes . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of retail stores at end of period: Carter’s - U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . OshKosh - U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.6% 37.4% 75.0% 11.6% 2.5% 14.1% 10.9% 100.0% 59.1% 40.9% 30.8% (1.4)% 11.5% 1.0% —% 0.1% 10.4% 3.7% 6.7% 531 200 124 855 36.2% 39.2% 75.4% 11.0% 2.8% 13.8% 10.8% 100.0% 58.5% 41.5% 32.9% (1.4)% 10.0% 0.5% —% 0.1% 9.5% 3.4% 6.1% 476 181 117 774 34.4% 41.2% 75.6% 11.9% 3.3% 15.2% 9.2% 100.0% 60.6% 39.4% 29.9% (1.6)% 11.0% 0.3% —% —% 10.7% 4.0% 6.8% 413 168 82 663 Note: Results may not be additive due to rounding. Comparable Sales Metrics Our comparable store sales metrics include sales for all stores that were open during the comparable fiscal period, including remodeled stores and certain relocated stores. A store becomes comparable following twelve consecutive full fiscal months of operations. If a store relocates within the same center with no business interruption or material change in square footage, the sales of such store will continue to be included in the comparable store metrics. If a store relocates to another center, or there is a material change in square footage, such store is treated as a new store. Stores that are closed during the period are included in the comparable store sales metrics up to the last full fiscal month of operations. Our comparable eCommerce sales metrics include sales from our websites that were active during the comparable fiscal period. 28 46496_10k.pdf Page 32 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers’ methods. FISCAL YEAR ENDED JANUARY 3, 2015 (53 WEEKS) COMPARED WITH FISCAL YEAR ENDED DECEMBER 28, 2013 (52 WEEKS) CONSOLIDATED NET SALES Compared to fiscal 2013, consolidated net sales in fiscal 2014 increased $255.2 million, or 9.7%, to $2.9 billion. This sales growth was primarily due to strength in both Carter’s segments and in our OshKosh retail segment. The 53rd week in fiscal 2014 contributed approximately $44.1 million in additional consolidated net sales. Changes in foreign currency exchange rates in fiscal 2014 as compared to fiscal 2013 negatively impacted consolidated net sales by approximately $16.0 million, or 0.6%. (dollars in thousands) For the fiscal years ended January 3, 2015 (53 weeks) % of Total net sales December 28, 2013 (52 weeks) % of Total net sales Net sales: Carter’s Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carter’s Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,087,165 1,081,888 37.6% $ 954,160 1,035,420 37.4% Total Carter’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,169,053 OshKosh Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OshKosh Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total OshKosh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,140 73,201 408,341 316,474 75.0% 11.6% 2.5% 14.1% 10.9% 1,989,580 289,311 74,564 363,875 285,256 36.2% 39.2% 75.4% 11.0% 2.8% 13.8% 10.8% Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,893,868 100.0% $2,638,711 100.0% F o r m 1 0 - K CARTER’S RETAIL SALES Carter’s retail sales increased $133.0 million, or 13.9%, in fiscal 2014 to $1.1 billion. The change in fiscal 2014 was primarily driven by: • • • • • Increase of $87.7 million from new store openings; Increase of $43.2 million in eCommerce sales; Decrease of $9.0 million in comparable store sales driven by a decline in the number of transactions; Decrease of $3.3 million due to the impact of store closings; and Increase of $13.7 million in incremental sales during the 53rd week of fiscal 2014, exclusive of the other factors noted above. Carter’s direct-to-consumer comparable sales increased 3.7%, comprised of eCommerce comparable sales growth of 26.1%, partially offset by a decline in retail stores comparable sales of 1.0%. The comparable sales metric for the 53 weeks ended January 3, 2015 utilizes a comparable 53-week period of the prior year. During fiscal 2014, we opened 61 Carter’s stores and closed six stores. There were 531 Carter’s retail stores (including 51 “side-by-side” locations) as of January 3, 2015. In fiscal 2015, we plan to open approximately 65 stores and close five stores. 29 46496_10k.pdf Page 33 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CARTER’S WHOLESALE SALES Carter’s wholesale sales increased $46.5 million, or 4.5%, in fiscal 2014 to $1.1 billion. The 2014 growth reflected a 3.9% increase in average price per unit and a 0.6% increase in units shipped, compared to fiscal 2013. Additionally, the 53rd week in fiscal 2014 contributed approximately $19.4 million in additional sales to the Carter’s wholesale segment. OSHKOSH RETAIL SALES OshKosh retail sales increased $45.8 million, or 15.8%, in fiscal 2014 to $335.1 million. The growth in net sales in fiscal 2014 was primarily driven by: • • • • • Increase of $25.4 million from new store openings; Increase of $12.7 million in eCommerce sales; Increase of $7.0 million in comparable store sales driven by an increase in the average transaction value; Decrease of $4.4 million due to the impact of store closings; and Increase of $4.8 million in incremental sales during the 53rd week of fiscal 2014, exclusive of the other factors noted above. OshKosh direct-to-consumer comparable sales increased 7.3%, comprised of eCommerce comparable sales growth of 27.4% and retail stores comparable sales growth of 3.3%. The comparable sales metric for the 53 weeks ended January 3, 2015 utilizes a comparable 53-week period of the prior fiscal year. During fiscal 2014, we opened 27 OshKosh stores (all in “side-by-side” locations) and closed eight stores. There were 200 OshKosh retail stores (including 51 “side-by-side” locations) as of January 3, 2015. In fiscal 2015, we plan to open approximately 45 “side-by-side” locations and close six stand-alone stores. OSHKOSH WHOLESALE SALES OshKosh wholesale sales decreased $1.4 million, or 1.8%, in fiscal 2014 to $73.2 million. Compared to fiscal 2013, this decrease reflected a 2.6% decline in units shipped, partially offset by a 0.8% increase in the average price per unit. Additionally, the 53rd week in fiscal 2014 contributed approximately $1.9 million in sales to our OshKosh wholesale segment. INTERNATIONAL SALES Our international sales include our Canada and Japan retail operations, international eCommerce, and international wholesale sales. 30 46496_10k.pdf Page 34 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) International sales increased $31.2 million, or 10.9%, in fiscal 2014 to $316.5 million. This overall increase in sales for fiscal 2014 reflected: • • • • $14.0 million in incremental sales in our international wholesale locations excluding Canada; $12.4 million in incremental sales in our Canadian wholesale business; $11.8 million in incremental sales in our Canadian retail stores primarily due to new store openings; and $4.4 million in incremental sales from our international eCommerce business primarily due to the launch of the Canada website in fiscal 2014. These increases were partially offset by an $11.5 million decrease in our retail operations in Japan, which we substantially exited in the first quarter of fiscal 2014. Changes in foreign currency exchange rates in fiscal 2014 as compared to fiscal 2013 negatively impacted international segment’s net sales by approximately $16.0 million, or 5.7%. Additionally, sales that occurred during the 53rd week of fiscal 2014 totaled $4.3 million for our international segment. Comparable store sales in Canada declined 3.4% in fiscal 2014, which reflects the combined growth in the Carter’s and OshKosh branded products that was more than offset by the discontinuation of the legacy Bonnie Togs private label brands. The comparable sales metric for the 53 weeks ended January 3, 2015 utilizes a comparable 53-week period of the prior fiscal year. During fiscal 2014, we opened 23 retail stores in Canada and closed one store. There were a total of 124 retail stores in Canada as of January 3, 2015. In fiscal 2015, we plan to open approximately 20 retail stores in Canada. GROSS PROFIT Our consolidated gross profit increased $89.1 million, or 8.1%, to $1.2 billion in fiscal 2014. Consolidated gross margin decreased from 41.5% in fiscal 2013 to 40.9% in fiscal 2014, primarily attributable to higher product costs and unfavorable foreign exchange rate movements, partially offset by a favorable mix of direct-to- consumer business and favorable freight expenses. We include distribution costs in selling, general, and administrative expenses. Accordingly, our gross profit may not be comparable to other companies that include such distribution costs in their cost of goods sold. SELLING, GENERAL, AND ADMINISTRATIVE (“SG&A”) EXPENSES SG&A expenses in fiscal 2014 increased $21.8 million, or 2.5%, to $890.3 million. As a percentage of net sales, SG&A expenses decreased from 32.9% to 30.8% in fiscal 2014. The decrease in SG&A expenses as a percentage of net sales in fiscal 2014 reflected: • • • • • $26.6 million in lower costs associated with the office consolidation; $13.0 million in lower costs associated with our exit from Japan retail operations; $7.7 million in lower marketing expenses; $3.3 million in lower costs associated with insurance and other employee benefits; and $1.0 million in lower incentive compensation costs. 31 F o r m 1 0 - K 46496_10k.pdf Page 35 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ROYALTY INCOME We license the use of our Carter’s, Just One You, Child of Mine, OshKosh B’gosh, OshKosh, Genuine Kids from OshKosh, and Precious Firsts brand names. Royalty income from these brands increased $1.9 million, or 5.1%, to $39.2 million in fiscal 2014. OPERATING INCOME Consolidated operating income increased $69.2 million, or 26.2%, to $333.3 million in fiscal 2014. The table below summarizes the changes in each of our segments’ operating results between fiscal 2014 and fiscal 2013: (dollars in thousands) Operating income (loss) for fiscal 2013 . . . . . . . . . . . . . Increase (decrease) during fiscal 2014: Carter’s Retail Carter’s Wholesale OshKosh Retail OshKosh Wholesale International Corporate Expenses Total $181,169 $185,501 $ (1,433) $ 9,796 $40,641 $(151,523) $264,151 Gross profit . . . . . . . . . . . . . . Royalty income . . . . . . . . . . . SG&A expenses . . . . . . . . . . 63,458 1,297 34,627 2,240 (508) 1,770 21,210 316 11,883 (1,125) 263 92 2,070 536 3,777 1,208 — (30,378) 89,061 1,904 21,771 Operating income (loss) for fiscal 2014 . . . . . . . . . . . . . $211,297 $185,463 $ 8,210 $ 8,842 $39,470 $(119,937) $333,345 (a) (b) (c) (d) (e) (f) (a) Carter’s retail operating income in fiscal 2014 increased $30.1 million, or 16.6%, from fiscal 2013 to $211.3 million. The segment’s operating margin increased from 19.0% in fiscal 2013 to 19.4% in fiscal 2014. The primary drivers of the change in operating income were an: • • • Increase in gross profit of $63.5 million primarily due to higher sales as previously discussed, partially offset by higher product costs; Increase in royalty income of $1.3 million; and Increase in SG&A expenses of $34.6 million primarily consisting of a: • Increase of $38.4 million in retail expenses associated with a higher store count and growth in the eCommerce business; • Decrease of $6.8 million distribution and freight expenses; and • Decrease of $3.4 million in marketing expenses due to the absence of television advertising in fiscal 2014. 32 46496_10k.pdf Page 36 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (b) Carter’s wholesale operating income was $185.5 million for both fiscal 2014 and fiscal 2013. The segment’s operating margin decreased from 17.9% in fiscal 2013 to 17.1% in fiscal 2014. The primary drivers in operating income were a/(an): • • • Increase in gross profit of $2.2 million primarily due to higher sales as previously discussed and lower air freight related to inventory, partially offset by higher product costs; Decrease in royalty income of $0.5 million; and Increase of $1.8 million in SG&A expenses primarily consisting of a/(an): • Increase of $9.2 million in distribution and freight costs due to growth in the business; • Decrease of $4.8 million in other administrative expenses primarily due cost savings from the office consolidation; and • Decrease of $2.5 million in marketing expenses due to the absence of television advertising in fiscal 2014. (c) OshKosh retail operating income in fiscal 2014 increased $9.6 million from fiscal 2013 to $8.2 million. The segment’s operating margin increased from (0.5)% in fiscal 2013 to 2.4% in fiscal 2014. The primary drivers of the change in operating income were an: • • • Increase in gross profit of $21.2 million primarily due to higher sales as previously discussed, partially offset by higher product costs; Increase in royalty income of $0.3 million; and Increase of $11.9 million in SG&A largely due to $10.3 million in incremental retail expenses associated with a higher store count and growth in the eCommerce business. (d) OshKosh wholesale operating income in fiscal 2014 decreased $1.0 million, or 9.7%, from fiscal 2013 to $8.8 million. The segment’s operating margin decreased from 13.1% in fiscal 2013 to 12.1% in fiscal 2014. The primary drivers of the change in operating income were a/(an): • • • Decrease in gross profit of $1.1 million due to a decrease in sales as previously discussed, higher product costs, and increased promotional pricing; Increase in royalty income of $0.3 million; and Increase in SG&A expenses of $0.1 million largely due to a/(an): • • Increase of $0.9 million in distribution and freight costs due to growth in the business; Increase of $0.3 million in other administrative expenses; and • Decrease of $1.2 million in marketing costs due to less advertising in the fiscal 2014. F o r m 1 0 - K 33 46496_10k.pdf Page 37 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (e) International operating income in fiscal 2014 decreased $1.2 million, or 2.9%, from fiscal 2013 to $39.5 million. This segment’s operating margin decreased from 14.2% in fiscal 2013 to 12.5% in fiscal 2014. The primary drivers of the change in operating income were an: • • • Increase in gross margin of $2.1 million primarily due to an increase in sales as previously discussed, partially offset by increased promotional pricing and higher product costs due to an unfavorable currency impact; Increase in royalty income of $0.5 million; and Increase of $3.8 million in SG&A expenses largely due to a/(an): • • • Increase of $4.3 million in distribution and freight costs due to growth in the business; Increase of $1.8 million in retail expenses associated with a higher Canadian store count; Increase of $1.8 million in marketing expenses also due to growth in the business; and • Decrease of $5.5 million in retail administration costs due to the exit of retail operations in Japan. (f) Corporate operating expenses in fiscal 2014 decreased $31.6 million, or 20.8%, from fiscal 2013 to $119.9 million. Corporate expenses as a percentage of consolidated net sales decreased from 5.7% in fiscal 2013 to 4.1% in fiscal 2014. The decrease in operating expenses primarily reflected the completion of office consolidations and facility closures of $26.6 million and lower costs associated with insurance and other employee benefits of $3.3 million. INTEREST EXPENSE Interest expense in fiscal 2014 increased $14.2 million from fiscal 2013 to $27.7 million. Weighted-average borrowings for fiscal 2014 were $586.0 million at an effective interest rate of 4.68%, compared to weighted- average borrowings for fiscal 2013 of $338.7 million at an effective interest rate of 3.92%. The increase in the effective interest rate (which includes the effect of the amortization of debt issuance costs) is primarily the result of a full year of interest expense in fiscal 2014 on the $400 million senior notes that were issued in the third quarter of 2013 at an interest rate of 5.25%. Our financial results are subject to risks from interest rate fluctuations on our secured revolving credit facility, which carries variable interest rates. As of January 3, 2015, our outstanding variable rate debt aggregated $186.0 million. An increase or decrease of 1% in the applicable rate applied to our weighted-average borrowings would have increased or decreased our fiscal 2014 interest expense by approximately $1.9 million. OTHER EXPENSE, NET Other expenses, net, in fiscal 2014 increased $1.3 million, or 66.3% from fiscal 2013 to $3.2 million primarily due to higher foreign currency losses in fiscal 2014. INCOME TAXES Our effective tax rate for both fiscal 2014 and 2013 was 35.7%. NET INCOME Our net income for fiscal 2014 increased $34.3 million, or 21.4%, to $194.7 million as compared to $160.4 million in fiscal 2013, due to the factors described above. 34 46496_10k.pdf Page 38 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FISCAL YEAR ENDED DECEMBER 28, 2013 (52 WEEKS) COMPARED WITH FISCAL YEAR ENDED DECEMBER 29, 2012 (52 WEEKS) CONSOLIDATED NET SALES In fiscal 2013, consolidated net sales increased $257.0 million, or 10.8%, to $2.6 billion. The growth primarily reflects strength in our Carter’s Wholesale, Carter’s Retail and International segments. Foreign currency translation negatively impacted international net sales by approximately $6.8 million, or 3.1%. (dollars in thousands) For the fiscal years ended December 28, 2013 (52 weeks) % of Total net sales December 29, 2012 (52 weeks) % of Total net sales Net sales: Carter’s Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carter’s Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,035,420 954,160 39.2% $ 981,445 818,909 36.2% Total Carter’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,989,580 OshKosh Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OshKosh Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total OshKosh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289,311 74,564 363,875 285,256 75.4% 11.0% 2.8% 13.8% 10.8% 1,800,354 283,343 79,752 363,095 218,285 41.2% 34.4% 75.6% 11.9% 3.3% 15.2% 9.2% Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,638,711 100.0% $2,381,734 100.0% F o r m 1 0 - K CARTER’S WHOLESALE SALES Carter’s wholesale sales increased $54.0 million, or 5.5%, in fiscal 2013 to $1,035.4 million. This growth was primarily driven by a 4.4% increase in units shipped as compared to fiscal 2012. CARTER’S RETAIL SALES Carter’s retail sales increased $135.3 million, or 16.5%, in fiscal 2013 to $954.2 million. The increase was driven by incremental sales of $79.1 million generated by new store openings, $54.6 million generated by eCommerce sales, and a comparable store sales increase of $6.8 million, or 1.0%, partially offset by the impact of store closings of $5.3 million. On a comparable store basis, the average transaction value increased 1.1%. Carter’s direct-to-consumer comparable sales, defined as the combination of retail store and eCommerce comparable sales, increased 7.7%, comprised of eCommerce comparable sales growth of 49.9% and a comparable retail store comparable sales growth of 1.0%. During fiscal 2013, we opened 65 Carter’s stores and closed two stores. There was a total of 476 Carter’s retail stores as of December 28, 2013. OSHKOSH RETAIL SALES OshKosh retail sales increased $6.0 million, or 2.1%, in fiscal 2013 to $289.3 million. The increase reflects incremental sales of $13.5 million generated by eCommerce sales and $11.0 million generated by new store openings, partially offset by the impact of store closings of $10.5 million and a comparable store sales decrease of $8.0 million, or 3.4%. OshKosh direct-to-consumer comparable sales increased 2.0%, comprised of eCommerce comparable sales growth of 40.9% and a retail store comparable sales decline of 3.4%. On a comparable store basis, the average retail store transaction value remained flat and transactions decreased during fiscal 2013 as compared to fiscal 2012. During fiscal 2013, we opened 18 OshKosh stores and closed five stores. There was a total of 181 OshKosh retail stores as of December 28, 2013. 35 46496_10k.pdf Page 39 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) OSHKOSH WHOLESALE SALES OshKosh wholesale sales decreased $5.2 million, or 6.5%, in fiscal 2013 to $74.6 million. The decrease in wholesale sales reflects a 12.2% decrease in units shipped, partially offset by a 6.5% increase in average price per unit as compared to fiscal 2012. INTERNATIONAL SALES Our international sales include our Canada and Japan retail operations, international eCommerce, and wholesale sales. International sales increased $67.0 million, or 30.7%, in fiscal 2013 to $285.3 million. Our international retail sales increased $38.6 million, or 28.3%, to $175.0 million, driven by incremental Canadian sales of $19.9 million (primarily from new store openings), sales by our Japanese operations of $15.9 million, and $2.8 million of incremental eCommerce sales. Comparable store sales in Canada decreased $2.2 million or 1.8%. In addition, international wholesale sales increased $28.4 million, or 34.7%, to $110.2 million. During fiscal 2013, we opened 21 retail stores in Canada and closed one store. There was a total of 102 retail stores in Canada as of December 28, 2013. In the first quarter of 2013, we assumed control of retail operations in Japan, previously managed by a licensee. In fiscal 2013, our retail operations in Japan generated sales of approximately $15.9 million and an operating loss of $11.3 million, which includes exit costs of approximately $4.1 million. In the fourth quarter of 2013, we decided to exit those operations based on revised forecasts which did not meet our investment objectives. GROSS PROFIT Our gross profit increased $157.4 million, or 16.8%, to $1,095.4 million in fiscal 2013. Gross margin increased from 39.4% in fiscal 2012 to 41.5% in fiscal 2013 primarily as the result of higher mix of direct-to-consumer sales and lower product costs compared to prior year. We include distribution costs in selling, general, and administrative expenses. Accordingly, our gross profit may not be comparable to other companies that include such distribution costs in their cost of goods sold. SELLING, GENERAL, AND ADMINISTRATIVE (“SG&A”) EXPENSES SG&A expenses in fiscal 2013 increased $155.3 million, or 21.8%, to $868.5 million. As a percentage of net sales, SG&A expenses increased from 29.9% to 32.9% in fiscal 2013. 36 46496_10k.pdf Page 40 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The increase in SG&A expenses as a percentage of net sales reflects: • • • • • • $39.9 million in higher domestic and Canada retail store expenses; $26.9 million in incremental costs associated with the office consolidation; $18.4 million in incremental distribution and freight costs; $18.1 million in expenses associated with the Japan business, including operating costs and costs to exit the operations; $13.6 million in amortization of the H.W. Carter tradename; and $10.3 million in incremental operating expenses associated with the growth of the eCommerce business. Slightly offsetting these increases were: • $12.0 million in lower provisions for performance-based compensation. ROYALTY INCOME We license the use of our Carter’s, Just One You, Child of Mine, OshKosh B’gosh, OshKosh, Genuine Kids from OshKosh, and Precious Firsts brand names. Royalty income from these brands in both fiscal 2013 and fiscal 2012 was approximately $37.3 million, including $5.5 million and $6.8 million of international royalty income in fiscal 2013 and fiscal 2012, respectively. International royalty income in fiscal 2013 declined primarily due to our assumption of a licensee’s operations in Japan. OPERATING INCOME Operating income increased $2.2 million, or 0.8%, to $264.2 million in fiscal 2013. Following is information regarding our segment results: (dollars in thousands) For the fiscal years ended December 28, 2013 Segment operating margin December 29, 2012 Segment operating margin Operating income (loss): Carter’s Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carter’s Retail $ 185,501 181,169 Total Carter’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366,670 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OshKosh Retail OshKosh Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total OshKosh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,433) 9,796 8,363 40,641 17.9% 19.0% 18.4% (0.5)% 13.1% 2.3% 14.2% $172,673 145,940 318,613 (7,752) 4,086 (3,666) 17.6% 17.8% 17.7% (2.7)% 5.1% (1.0)% 43,376 19.9% Corporate expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (151,523) (96,337) Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 264,151 10.0% $261,986 11.0% F o r m 1 0 - K 37 46496_10k.pdf Page 41 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Carter’s wholesale operating income in fiscal 2013 increased $12.8 million, or 7.4%, from fiscal 2012 to $185.5 million. The segment’s operating margin increased from 17.6% in fiscal 2012 to 17.9%. The increase in operating income reflects a $21.2 million improvement in segment gross profit in fiscal 2013 compared to fiscal 2012 primarily as a result of incremental sales, as discussed in the previous section for Carter’s wholesale sales. The improvement in net sales was partially offset by an $8.3 million increase in SG&A expenses which was largely due to $6.3 million in incremental distribution and freight costs associated with growth in the business. Carter’s retail operating income in fiscal 2013 increased $35.2 million, or 24.1%, from fiscal 2012 to $181.2 million. The segment’s operating margin increased from 17.8% in fiscal 2012 to 19.0%. The increase in operating income reflects an $87.4 million improvement in segment gross profit in fiscal 2013 compared to fiscal 2012 primarily as a result of incremental sales, as discussed in the previous section for Carter’s retail sales. The improvement in net sales was partially offset by a $52.8 million increase in SG&A due largely to $37.1 million in incremental retail expenses associated with a higher store count and growth in the eCommerce business, and $9.8 million in incremental distribution and freight expenses also due to eCommerce growth. OshKosh retail operating loss in fiscal 2013 improved $6.3 million, or 81.5% from fiscal 2012 to $1.4 million. This segment’s operating margin improved from (2.7)% in fiscal 2012 to (0.5)%. The improvement in segment operating loss reflects a $14.1 million increase in segment gross profit in fiscal 2013 compared to fiscal 2012 primarily due to higher average prices, as discussed in the previous section for OshKosh retail sales. This improvement was partially offset by an $8.0 million increase in SG&A expenses largely due to $4.2 million in incremental retail expenses associated with a higher store count and growth in the eCommerce business, and $1.6 million in incremental distribution and freight expenses also due to eCommerce growth. OshKosh wholesale operating income in fiscal 2013 increased $5.7 million from fiscal 2012 to $9.8 million. The segment’s operating margin increased from 5.1% in fiscal 2012 to 13.1%. The increase in operating income reflects a $3.5 million improvement in segment gross profit in fiscal 2013 compared to fiscal 2012 primarily due to higher average prices as discussed in the previous section for OshKosh wholesale sales, a $1.9 million decrease in SG&A expenses primarily due to $1.3 million in lower provisions for performance-based compensation, and a $0.3 million increase in royalty income. International operating income in fiscal 2013 decreased $2.7 million, or 6.3%, from fiscal 2012 to $40.6 million. This segment’s operating margin decreased from 19.9% in fiscal 2012 to 14.2%. The decrease in international operating income reflects a $32.8 million increase in SG&A expenses in fiscal 2013 compared to fiscal 2012 largely due to $18.1 million in Japan operating and exit costs and $8.9 million in incremental Canada retail store expenses associated with a higher store count. These cost increases were partially offset by a $31.1 million improvement in segment gross profit in fiscal 2013 compared to fiscal 2012 primarily due to incremental sales as discussed in the previous section for International sales. Royalty income decreased $1.0 million year-over-year primarily due to the absence of Japan royalty income in fiscal 2013 as a result of assuming our Japan licensee’s operations in the first quarter of fiscal 2013. Corporate operating expenses in fiscal 2013 increased $55.2 million, or 57.3%, from fiscal 2012 to $151.5 million. Corporate expenses as a percentage of consolidated net sales increased from 4.0% in fiscal 2012 to 5.7%. The increase in corporate operating expenses primarily reflects $25.7 million in incremental costs associated with the office consolidation and other facility closures and $13.6 million in amortization of the H.W. Carter tradename. INTEREST EXPENSE Interest expense in fiscal 2013 increased $6.7 million to $13.4 million, compared to fiscal 2012. Weighted- average borrowings for fiscal 2013 were $338.7 million at an effective interest rate of 3.92%, as compared to weighted-average borrowings for fiscal 2012 of $210.4 million at an effective interest rate of 3.23%. The effective interest rate for fiscal 2013 was higher than fiscal 2012 as a result of the issuance of the senior notes (at an interest rate of 5.25%) in the third quarter of fiscal 2013, partially offset by the impact of the refinancing of the secured revolving credit facility in the third quarter of fiscal 2012. 38 46496_10k.pdf Page 42 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Our operating results are subject to risk from interest rate fluctuations on our secured revolving credit facility, which carries variable interest rates. As of December 28, 2013, our outstanding variable rate debt aggregated approximately $186.0 million. An increase or decrease of 1% in the applicable rate applied to our weighted- average borrowings would have increased or decreased our fiscal 2013 interest cost by approximately $1.9 million. OTHER EXPENSE, NET During fiscal 2013 and 2012, other expense, net, principally comprised foreign currency losses of $1.9 million and gains of $0.1 million, respectively, related to foreign currency denominated payables. INCOME TAXES Our effective tax rate was 35.7% for fiscal 2013 as compared to 36.9% for fiscal 2012. The decrease in our effective rate was attributable to the expansion of our international operations, which are taxed at slightly lower effective rates, and the absence of non-deductible acquisition costs in 2013. NET INCOME Our net income for fiscal 2013 decreased $0.7 million, or 0.5%, to $160.4 million as compared to $161.2 million in fiscal 2012. FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY Our primary cash needs are for working capital and capital expenditures. Substantially all of our cash is held in the United States. Our primary sources of liquidity will continue to be cash and cash equivalents on hand, cash flow from operations, and borrowings available under our secured revolving credit facility. We expect that these sources will fund our ongoing requirements for the foreseeable future. Further, we do not expect current economic conditions to prevent us from meeting our cash requirements. These sources of liquidity may be affected by events described in our risk factors, as further discussed in Part I, Item 1A of this filing. BALANCE SHEET Net accounts receivable at January 3, 2015 were $184.6 million compared to $193.6 million at December 28, 2013. The decrease of $9.0 million, or 4.7%, as compared to December 28, 2013 reflects a decrease in other receivables primarily related to the 2014 collection of tenant improvement allowances for the new corporate headquarters facility. Net accounts receivable at December 28, 2013 were $193.6 million compared to $168.0 million at December 29, 2012. The increase of $25.6 million, or 15.2%, compared to December 29, 2012 reflected growth in the business along with an increase of approximately $17.9 million in other receivables related to tenant improvement allowances for the new corporate headquarters facility. Inventories at January 3, 2015 were $444.8 million compared to $417.8 million at December 28, 2013. The increase of $27.0 million, or 6.5%, as compared to December 28, 2013, reflects an increase in inventory levels to support business growth and higher product costs as compared to the prior year. Inventories at December 28, 2013 were $417.8 million compared to $349.5 million at December 29, 2012. The increase of $68.2 million, or 19.5%, compared to December 29, 2012 reflected an increase in inventory levels to support planned sales and store openings, in addition to higher product costs compared to the prior year. F o r m 1 0 - K 39 46496_10k.pdf Page 43 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CASH FLOW Net cash provided by operating activities for fiscal 2014 was $282.4 million compared to net cash provided by operating activities of $209.7 million in fiscal 2013. The increase in operating cash flow primarily reflects an increase in net income and favorable changes in net working capital. Net cash provided by operating activities for fiscal 2013 was $209.7 million compared to net cash provided by operating activities of $278.6 million in fiscal 2012. The decrease in operating cash flow primarily reflects changes in net working capital. The timing of payments and receipts in the normal course of business can impact our working capital. Our capital expenditures were $103.5 million in fiscal 2014 compared to $182.5 million in fiscal 2013, primarily reflecting expenditures of approximately $56.5 million for our U.S. and international retail store openings and remodelings, $19.6 for information technology initiatives, $18.2 million for the Braselton, Georgia distribution facility, and $8.5 million for the new corporate headquarters facility. Our capital expenditures were $182.5 million in fiscal 2013 compared to $83.4 million in fiscal 2012, primarily reflecting expenditures of approximately $55.8 million for our U.S. and international retail store openings and remodelings, $54.0 million for the Braselton, Georgia distribution facility, $35.9 million for the new corporate headquarters facility, and $29.5 million for information technology initiatives. We plan to invest approximately $120 million in capital expenditures in fiscal 2015, primarily for U.S. and international retail store openings and remodelings, and information technology. SECURED REVOLVING CREDIT FACILITY On October 15, 2010, we entered into a $375 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) secured revolving credit facility with Bank of America as sole lead arranger and administrative agent, JP Morgan Chase Bank as syndication agent, and other financial institutions. On December 22, 2011, we amended and restated the secured revolving credit facility to, among other things, provide a U.S. dollar secured revolving facility of $340 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) plus a $35 million multicurrency secured revolving facility ($15 million sub- limit for letters of credit and a swing line sub-limit of $5 million), which is available for borrowings by either TWCC or our Canadian subsidiary, in U.S. dollars or Canadian dollars. On August 31, 2012, we amended and restated the secured revolving credit facility to, among other things, improve interest rates applicable to pricing, extend the maturity of the facility, and allow borrowings in currencies other than U.S. dollars or Canadian dollars subject to the consent of all multicurrency lenders. The aggregate principal amount of the facility remained unchanged at $375 million, consisting of a $340 million U.S. dollar secured revolving credit facility and a $35 million multicurrency secured revolving credit facility (although the sub-limit for U.S. dollar letters of credit was increased to $175 million). In connection with the amendment, we recorded approximately $1.9 million in debt issuance costs which, together with the existing unamortized debt issuance costs, will be amortized over the new remaining term of the facility (five years). The term of the secured revolving credit facility expires August 31, 2017. Pricing Options The secured revolving credit facility provides for different pricing options based on, among other things, the currency being borrowed and our leverage. Amounts outstanding under the secured revolving credit facility as of January 3, 2015 were accruing interest at a LIBOR rate plus 2.00%. 40 46496_10k.pdf Page 44 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Covenants The secured revolving credit facility contains and defines financial covenants, including a lease adjusted leverage ratio (defined as, with certain adjustments, the ratio of our consolidated indebtedness plus six times rent expense to consolidated net income before interest, taxes, depreciation, amortization, and rent expense (“EBITDAR”)) to exceed (x) if such period ends on or before December 31, 2016, 3.75:1.00 and (y) if such period ends after December 31, 2016, 3.50:1.00; and 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)), for any such period to be less than 2.50:1.00. As of January 3, 2015, we are in compliance with our financial debt covenants. Outstanding Amount At January 3, 2015, we had approximately $186.0 million in revolver borrowings, exclusive of $6.5 million of outstanding letters of credit, leaving approximately $182.5 million available for future borrowings. SENIOR NOTES On August 12, 2013, our 100% owned subsidiary, TWCC issued $400 million principal amount of senior notes at par, bearing interest at a rate of 5.25% per annum, and maturing on August 15, 2021, all of which were outstanding as of January 3, 2015. TWCC received net proceeds from the offering of the senior notes of approximately $394.2 million, after deducting bank fees. Approximately $7.0 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. The senior notes are unsecured and are fully and unconditionally guaranteed by Carter’s, Inc. and certain subsidiaries of TWCC. At any time prior to August 15, 2017, TWCC may redeem all or part of the senior notes at 100% of the principal amount redeemed plus an applicable premium and accrued and unpaid interest. On and after August 15, 2017, TWCC may redeem all or part of the senior notes at the redemption prices (expressed as percentages of principal amount of the senior notes to be redeemed) set forth below, plus accrued and unpaid interest. The redemption price applicable where the redemption occurs during the twelve-month period beginning on August 15 of each of the years indicated is as follows: Year 2017 . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . 2019 and thereafter . . . . . . . . . . . . . . . Percentage 102.63% 101.31% 100.00% In addition, until August 15, 2016, we may, at our option, redeem up to 35% of the aggregate principal amount of the senior notes at a redemption price equal to 105.25% of the aggregate principal amount, plus accrued and unpaid interest, subject to certain terms, with the proceeds of certain equity offerings. 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. In addition, if we or any of our restricted subsidiaries engages in certain asset sales, under certain circumstances we will be required to use the net proceeds to make an offer to purchase the senior notes at 100% of their principal amount. F o r m 1 0 - K 41 46496_10k.pdf Page 45 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The indenture 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, assume or guarantee additional indebtedness; (b) issue disqualified stock and preferred stock; (c) pay dividends or make distributions or other restricted payments; (d) prepay, redeem or repurchase certain debt; (e) make loans and investments (including joint ventures); (f) incur liens; (g) create restrictions on the payment of dividends or other amounts from restricted subsidiaries that are not guarantors of the notes; (h) sell or otherwise dispose of assets, including capital stock of subsidiaries; (i) consolidate or merge with or into, or sell substantially all of TWCC’s assets to, another person; (j) designate subsidiaries as unrestricted subsidiaries; and (k) enter into transactions with affiliates. Additionally, the 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% 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. During June 2014, TWCC completed the registration of the exchange offer for the senior notes that was required under the terms of such notes. Provisions in the Company’s secured revolving credit facility and indenture governing its senior notes could have the effect of restricting the Company’s ability to pay future cash dividends on or make future repurchases of its common stock, as further described in the Long-Term Debt note to the consolidated financial statements. BONNIE TOGS ACQUISITION On June 30, 2011, we purchased Bonnie Togs for total consideration of up to CAD $95 million, of which USD $61.2 million was paid in cash at closing and the balance to be paid contingent upon achieving certain earnings targets. In fiscal 2014 and fiscal 2013, we paid approximately USD $8.9 million and $14.7 million, respectively, after achieving interim earnings targets. As of January 3, 2015, a discounted contingent current liability of approximately USD $7.7 million was recorded based upon the high probability that Bonnie Togs will attain future earnings targets and the corresponding earnout payment is expected to be paid within a one year window. FACILITY CLOSURES In conjunction with the closure of the Hogansville, Georgia distribution facility, we incurred closure-related charges of approximately $1.9 million in fiscal 2013. No additional closing costs were incurred in fiscal 2014 and no accrual remains as of January 3, 2015. The Hogansville facility was sold during the fourth quarter of 2014 at a selling price that approximated the book value. In connection with the plan to consolidate our Shelton, Connecticut and Atlanta, Georgia offices, as well as certain functions from our other offices, into a new corporate headquarters facility in Atlanta, Georgia, we recorded charges of approximately $6.6 million in fiscal 2014, primarily related to severance and relocation and recruiting expenses. We have completed our consolidation efforts and the remaining balance in the accrual as of January 3, 2015 is approximately $3.6 million, consisting of $0.8 million in severance and $2.8 million in other closing costs related to a remaining lease liability. The severance accrual is expected to be substantially paid in the first half of 2015. We do not expect to incur any additional costs related to the office consolidation. In the fourth quarter of 2013, we made the decision to exit retail operations in Japan based on revised forecasts which did not meet our investment objectives. We recorded approximately $1.5 million in closing related-costs for fiscal 2014 and $3.0 million in fiscal 2013, primarily related to severance, accelerated depreciation, and other closing costs such as lease termination costs. We do not expect to incur any additional closing-related costs for the exit of retail operations in Japan, and no accrual remains as of January 3, 2015. 42 46496_10k.pdf Page 46 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) SHARE REPURCHASES In the second quarter of fiscal 2013, our Board of Directors authorized the repurchase of shares in an amount up to $300 million, inclusive of amounts remaining under previous authorizations. In the third quarter of 2013, our Board approved an additional $400 million share repurchase authorization. The total remaining capacity under the repurchase authorizations as of January 3, 2015, was approximately $185.1 million. Future repurchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity being at management’s discretion depending on market conditions, share price, other investment priorities, and other factors. The authorizations have no expiration date. Open Market Purchases During the fiscal year ended January 3, 2015, we purchased, in open market transactions, and retired 1,111,899 shares with an average share price of $73.84 for an aggregate cost of $82.1 million. During the fiscal year ended December 28, 2013, we purchased and retired 816,402 shares with an average share price of $66.31 for an aggregate cost of approximately $54.1 million in open market transactions. Accelerated Stock Repurchase Program On August 29, 2013, we entered into two fixed dollar uncollared accelerated stock repurchase (ASR) agreements totaling $400 million. The ASR agreements were settled in January 2014. As of the date of settlement, the Company had received a total of approximately 5.6 million shares. All shares received under the ASR Agreements were retired upon receipt. DIVIDENDS Our Board of Directors authorized quarterly cash dividends of $0.19 per share in each quarter of fiscal 2014. The dividends were paid during the fiscal quarter in which they were declared. Future declarations of quarterly dividends and the establishment of future record and payment dates are at the discretion of our Board of Directors, and are based on a number of factors, including our future financial performance and other investment priorities. Provisions in our secured revolving credit facility and indenture governing our senior notes could have the effect of restricting our ability to pay future cash dividends on or make future repurchases of our common stock. F o r m 1 0 - K 43 46496_10k.pdf Page 47 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) COMMITMENTS The following table summarizes as of January 3, 2015, the maturity or expiration dates of mandatory contractual obligations and commitments for the following fiscal years: (dollars in thousands) 2015 2016 2017 2018 2019 Thereafter Total Long-term debt . . . . . . . . . . . . . . . . Interest on debt (a) . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . Capital leases . . . . . . . . . . . . . . . . . . $ — $ — $186,000 $ — $ 25,036 125,650 392 25,036 121,100 392 23,691 115,889 392 21,000 108,653 352 — $400,000 $ 586,000 150,763 912,705 2,547 35,000 351,356 788 21,000 90,057 231 Total financial obligations . . . . . . . . Letters of credit . . . . . . . . . . . . . . . . 151,078 6,462 146,528 — 325,972 — 130,005 — 111,288 — 787,144 — 1,652,015 6,462 Total financial obligations and commitments (b) (c) . . . . . . . . . . . $157,540 $146,528 $325,972 $130,005 $111,288 $787,144 $1,658,477 (a) Reflects estimated variable rate interest on obligations outstanding on our secured revolving credit facility and senior notes as of January 3, 2015 using an interest rate of 2.17% (rate in effect at January 3, 2015) and 5.25%, respectively. (b) The table above excludes our reserves for income taxes, as we are unable to reasonably predict the ultimate amount or timing of settlement. (c) The table above excludes purchase obligations. Our estimate as of January 3, 2015 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 is estimated to be $400 - $500 million. In addition to the total contractual obligations and commitments in the table above, we have post-retirement benefit obligations and contingent consideration liabilities, which are included in other current liabilities and other long- term liabilities, as further described in our notes to the accompanying audited consolidated financial statements. OFF-BALANCE SHEET OBLIGATIONS We do not maintain off-balance sheet arrangements, transaction, obligations, or other relationships with unconsolidated entities except for those that are made in the normal course of our business and included in our Commitments table presented above. 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. 44 46496_10k.pdf Page 48 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) EFFECTS OF INFLATION AND DEFLATION Our product costs are subject to fluctuations in costs such as manufacturing, cotton, labor, fuel, and transportation. In recent years, we have experienced increased costs due to such fluctuations as well as higher product costs resulting from inventory purchased by our Canadian entity in U.S. dollars. In anticipation of higher product costs, we raised our selling prices on many of our products over the past two years, but have been unable to fully absorb the cost increases and our profitability has been adversely impacted. In recent years, we have also experienced deflationary pressure on our selling prices, in part driven by intense price competition in the young children’s apparel industry. If future product cost increases are more than anticipated, or if we are unable to offset such cost increases through selling price increases or otherwise, our profitability could be adversely affected. Future deflationary pressures on our selling prices could also adversely affect our profitability. 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 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 audited 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 We recognize wholesale and eCommerce revenue after shipment of products to customers, when title passes, when all risks and rewards of ownership have transferred, the sales price is fixed or determinable, and collectibility is reasonably assured. In certain cases, in which we retain the risk of loss during shipment, revenue recognition does not occur until the goods have reached the specified customer. In the normal course of business, we grant certain accommodations and allowances to our wholesale customers to assist these customers with inventory clearance or promotions. Such amounts are reflected as a reduction of net sales and are recorded based upon agreements with customers, historical trends, and annual forecasts. Retail store revenues are recognized at the point of sale. We reduce revenue for estimated customer returns and deductions. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make payments and other actual and estimated deductions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional allowance could be required. Past due balances over 90 days are reviewed individually for collectability. Our credit and collections department reviews all other balances regularly. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. 45 F o r m 1 0 - K 46496_10k.pdf Page 49 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) We record cooperative advertising arrangements with major wholesale customers at fair value. Such fair value is determined based upon, among other factors, comparable market analysis for similar advertisements. We have included the fair value of these arrangements as a component of selling, general, and administrative expenses on the accompanying consolidated statements of operations rather than as a reduction of revenue. Amounts determined to be in excess of the fair value of these arrangements are recorded as a reduction of net sales. INVENTORY We provide reserves for slow-moving inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than we project, additional write-downs may be required. 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 offered products and the development of new products. We use both 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. We may utilize a qualitative assessment to determine if it is “more likely than not” that the fair value of the reporting unit is less than its carrying value. If so, the two-step goodwill impairment test using quantitative assessments is required to be performed. If not, no further testing is required and the relevant qualitative factors supporting the strength in fair value are documented. 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. Under the quantitative assessment for goodwill, the first step is to compare the fair value of a reporting unit to its carrying value, including goodwill. We use discounted cash flow models to determine the fair value of a reporting unit. The assumptions used in these models are consistent with those we believe hypothetical marketplace participants would use. If the fair value of a reporting unit is less than its carrying value, the second step of the impairment test must be performed in order to determine the impairment loss, if any. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of the goodwill. A tradename is considered impaired if the estimated fair value of the tradename is less than the carrying amount. 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 future cash flows and selecting appropriate discount and royalty rates. 46 46496_10k.pdf Page 50 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. Based upon our most recent assessment, performed as of January 3, 2015, there was no impairment in the value of goodwill or indefinite-lived tradename assets and no reporting units were at risk. 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 advisors 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 its nature is unpredictable. We believe that our assessment of the probability of loss contingencies is reasonable, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assessment may prove ultimately to be incorrect, which could materially impact our consolidated financial statements. ACCOUNTING FOR INCOME TAXES As part of the process of preparing the accompanying audited 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 determine whether it is “more likely than not” that a tax position will be sustained upon the examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. For those income tax positions where it is not “more likely than not” that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest and penalties are also recognized. We also assess permanent and temporary differences resulting from differing bases 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. 47 F o r m 1 0 - K 46496_10k.pdf Page 51 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. Transaction gains and losses, such as those resulting from the settlement of nonfunctional currency receivables and payables, including intercompany balances, are included in foreign currency gain or loss in our consolidated statements of operations. Additionally, payable and receivable balances denominated in nonfunctional currencies are marked-to-market and the end of each reporting period, and the gain or loss is recognized in our consolidated statements of operations. EMPLOYEE BENEFIT PLANS We sponsor a defined contribution (401(k)) plan, 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. For the fiscal year ended January 3, 2015, revised mortality tables were used, and these revised tables reflected increased life expectancies for most all demographics. 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 unrecognized gains and losses. Unrecognized 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 will 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. See the employee benefit plans footnote to our accompanying audited consolidated financial statements for further details on rates and assumptions. 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. 48 46496_10k.pdf Page 52 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. 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 its probability assessment. F o r m 1 0 - K 49 46496_10k.pdf Page 53 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 United States 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 United States dollar and the local currencies of these contractors. Due to the number of currencies involved, we cannot quantify the potential impact of future currency fluctuations on net income (loss) in future years. 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 Canadian subsidiary records Canadian denominated sales which are then translated into U.S. dollars using weighted-average exchange rates. The changes in foreign currency exchange rates in fiscal 2014 as compared to fiscal 2013 negatively impacted international segment net sales in fiscal 2014 by approximately $16.0 million, primarily due to the devaluation of the Canadian dollar relative to the U.S. dollar. Fluctuations in exchange rates, primarily between the United States dollar and the Canadian dollar, may affect our results of operations, financial position, and cash flows. Transactions by our Canadian subsidiary may be denominated in a currency other than the entity’s functional currency, which is the Canadian dollar. Foreign currency transaction gains and losses also include the impact of intercompany loans with foreign subsidiaries that are marked to market. In our statement of operations, these gains and losses are recorded within other expense, net, and totaled approximately $1.9 million and $0.1 million for fiscal year 2014 and 2013, respectively. Interest Rate Risk Our operating results are subject to risk from interest rate fluctuations on our secured revolving credit facility, which carries variable interest rates. Weighted-average variable rate borrowings as of January 3, 2015 were $186.0 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 2014 by approximately $1.9 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. 50 46496_10k.pdf Page 54 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CARTER’S, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets at January 3, 2015 and December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations for the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 52 53 54 Consolidated Statements of Comprehensive Income for the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Consolidated Statements of Cash Flows for the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 58 F o r m 1 0 - K 51 46496_10k.pdf Page 55 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders’ of Carter’s, Inc.: In our opinion, the accompanying consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Carter’s, Inc. and its subsidiaries at January 3rd, 2015 and December 28th, 2013, and the results of their operations and their cash flows for each of the three years in the period ended January 3rd, 2015 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 3rd, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these 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 these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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. 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 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. /s/ PricewaterhouseCoopers LLP Atlanta, Georgia February 26, 2015 52 46496_10k.pdf Page 56 CARTER’S, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except for share data) January 3, 2015 December 28, 2013 ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 340,638 184,563 444,844 34,788 36,625 $ 286,546 193,611 417,754 35,157 37,313 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant, and equipment, net Tradenames and other intangible, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred debt issuance costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,041,458 333,097 317,297 181,975 6,677 12,592 970,381 307,885 330,258 186,077 8,088 9,795 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,893,096 $1,812,484 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,243 97,728 $ 164,010 105,129 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,971 586,000 121,536 150,905 269,139 586,000 121,434 135,180 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,106,412 1,111,753 Commitments and contingencies Stockholders’ equity: Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at January 3, 2015, and December 28, 2013 . . . . . . . . . . . . . . . . . . — — Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 52,712,193 and 54,541,879 shares issued and outstanding at January 3, 2015 and December 28, 2013, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527 — (23,037) 809,194 545 4,332 (10,082) 705,936 Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 786,684 700,731 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,893,096 $1,812,484 F o r m 1 0 - K See accompanying notes to the consolidated financial statements. 53 46496_10k.pdf Page 57 CARTER’S, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data) For the fiscal years ended January 3, 2015 (53 weeks) December 28, 2013 (52 weeks) December 29, 2012 (52 weeks) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,893,868 1,709,428 $2,638,711 1,543,332 $2,381,734 1,443,786 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general, and administrative expenses . . . . . . . . . . . . . . . . . . . . Royalty income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,184,440 890,251 (39,156) 1,095,379 868,480 (37,252) Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense, net Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333,345 27,653 (403) 3,189 302,906 108,236 264,151 13,437 (669) 1,918 249,465 89,058 937,948 713,211 (37,249) 261,986 6,765 (234) 64 255,391 94,241 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 194,670 $ 160,407 $ 161,150 Basic net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend declared and paid per common share . . . . . . . . . . . . . . . . . . . $ $ $ 3.65 3.62 0.76 $ $ $ 2.78 2.75 0.48 $ $ $ 2.73 2.69 — See accompanying notes to the consolidated financial statements. 54 46496_10k.pdf Page 58 F o r m 1 0 - K CARTER’S, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss): Unrealized gain (loss) on OshKosh defined benefit plan, net of tax of $2,920, ($3,660), $690 for the fiscal years 2014, 2013, and 2012, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain (loss) on Carter’s post-retirement benefit obligation, net of tax of $91, ($210), ($107) for fiscal years 2014, 2013, and 2012, respectively . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . For the fiscal years ended January 3, 2015 (53 weeks) December 28, 2013 (52 weeks) December 29, 2012 (52 weeks) $ 194,670 $ 160,407 $ 161,150 (4,963) 6,238 (1,163) (147) (7,845) 371 (5,486) 1,123 182 1,058 77 Total other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . (12,955) Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 181,715 $ 161,530 $ 161,227 See accompanying notes to the consolidated financial statements. 55 46496_10k.pdf Page 59 CARTER’S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) For the fiscal years ended December 28, 2013 (52 weeks) December 29, 2012 (52 weeks) January 3, 2015 (53 weeks) Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of H.W. Carter and Sons tradenames . . . . . . . . . . . . . . . . . . . . Accretion of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . Unrealized foreign currency exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . Loss on disposal of property, plant, and equipment . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 194,670 $ 160,407 $ 161,150 58,487 16,437 1,348 1,533 17,598 2,378 (4,700) 1,157 3,911 8,405 (32,151) (2,719) 16,043 54,915 13,588 2,825 1,049 16,040 — (11,040) 272 596 (26,064) (70,691) (18,716) 86,515 39,848 — 3,589 877 13,049 — (2,760) 802 (9,651) (10,200) (1,790) (6,004) 89,709 Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . 282,397 209,696 278,619 Cash flows from investing activities: Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of tradenames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of property, plant, and equipment . . . . . . . . . . . . . . . . . . (103,453) (3,550) 2,271 (182,525) (38,007) — Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (104,732) (220,532) Cash flows from financing activities: Proceeds from senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowings under secured revolving credit facility . . . . . . . . . . . . . . . . . . . . Payments on secured revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . Withholdings from vesting of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (177) — — (82,099) (8,901) (40,477) 4,700 (4,548) 9,064 400,000 (6,989) — — (454,133) (14,721) (27,715) 11,040 (5,052) 12,912 Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (122,438) (84,658) Net effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,135) Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . 54,092 286,546 (196) (95,690) 382,236 (83,398) — 6 (83,392) — (1,916) 2,500 (52,500) — — — 2,760 (2,846) 5,685 (46,317) (168) 148,742 233,494 Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 340,638 $ 286,546 $ 382,236 See accompanying notes to the consolidated financial statements. 56 46496_10k.pdf Page 60 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY CARTER’S, INC. (dollars in thousands) Common stock - shares Common stock - $ Additional paid-in capital Accumulated other comprehensive (loss) income Retained earnings Total stockholders’ equity Balance at December 31, 2011 . . . . . . . . 58,595,421 $ 586 $ 231,738 $ (11,282) $ 584,667 $ 805,709 Income tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . Exercise of stock options . . . . . . . . . . . . . . Withholdings from vesting of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock activity . . . . . . . . . . . . . . Stock-based compensation expense . . . . . Issuance of common stock . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . — 254,567 (61,536) 316,479 — 21,708 — — 3 (1) 3 — — — 2,760 5,682 (2,845) (3) 11,864 1,080 — — — — — — — 77 — — — — — — 161,150 2,760 5,685 (2,846) — 11,864 1,080 161,227 Balance at December 29, 2012 . . . . . . . . . 59,126,639 $ 591 $ 250,276 $ (11,205) $ 745,817 $ 985,479 Income tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . Exercise of stock options . . . . . . . . . . . . . . Withholdings from vesting of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock activity . . . . . . . . . . . . . . Stock-based compensation expense . . . . . Issuance of common stock . . . . . . . . . . . . Repurchases of common stock . . . . . . . . . Cash dividends declared and paid . . . . . . . Comprehensive income . . . . . . . . . . . . . . . — 669,834 (84,766) 240,899 — 16,173 (5,426,900) — — — 7 (1) 2 — — (54) — — 11,040 12,905 (5,051) (2) 15,572 1,080 (281,488) — — — — — — 11,040 12,912 — — — — — — — — — (172,591) (27,697) — 160,407 1,123 (5,052) — 15,572 1,080 (454,133) (27,697) 161,530 Balance at December 28, 2013 . . . . . . . . . 54,541,879 $ 545 $ 4,332 $ (10,082) $ 705,936 $ 700,731 Income tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . Exercise of stock options . . . . . . . . . . . . . . Withholdings from vesting of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock activity . . . . . . . . . . . . . . Stock-based compensation expense . . . . . Issuance of common stock . . . . . . . . . . . . Repurchases of common stock . . . . . . . . . Cash dividends declared and paid . . . . . . . Comprehensive income . . . . . . . . . . . . . . . — 287,511 (66,352) 70,349 — 14,859 (2,136,053) — — — 3 (1) 1 — — (21) — — 4,700 9,061 (4,547) (1) 16,517 1,081 (31,143) — — — — — — — — — — — — (12,955) — — — — (50,935) (40,477) 194,670 4,700 9,064 (4,548) — 16,517 1,081 (82,099) (40,477) 181,715 Balance at January 3, 2015 . . . . . . . . . . . . 52,712,193 $ 527 $ — $ (23,037) $ 809,194 $ 786,684 F o r m 1 0 - K See accompanying notes to the consolidated financial statements. 57 46496_10k.pdf Page 61 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1—THE COMPANY Carter’s, Inc. and its wholly owned subsidiaries (collectively, the “Company,” and “its”) design, source, and market branded childrenswear under the Carter’s, Child of Mine, Just One You, Precious Firsts, OshKosh, and other brands. The Company’s products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to major domestic and international retailers and for the Company’s own retail stores and websites that market its brand name merchandise and other licensed products manufactured by other companies. As of January 3, 2015, the Company operated 531 Carter’s domestic stores, 200 OshKosh domestic stores, and 124 Canadian stores. NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying audited 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. RECLASSIFICATIONS Certain prior year amounts have been reclassified for comparative purposes. FISCAL YEAR Our fiscal year ends on the Saturday, in December or January nearest the last day of December, resulting in an additional week of results every five or six years. Fiscal 2014, which ended on January 3, 2015, contained 53 weeks. Fiscal 2013 and fiscal 2012, which ended on December 28, 2013 and December 29, 2012 respectively, each contained 52 weeks. 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. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS Translation adjustments The functional currency of substantially all of the Company’s 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 the accompanying audited consolidated balance sheet. 58 46496_10k.pdf Page 62 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 intercompany loans with foreign subsidiaries that are of a short-term investment nature. Foreign currency transaction gains and losses are recognized in earnings, as a separate component of other expense, net, within the audited consolidated statements of 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, U.S. Treasury securities, and cash management funds invested in U.S. government instruments. These investments are stated at cost, which approximates fair value. ACCOUNTS RECEIVABLE The components of accounts receivable, net, as of January 3, 2015 and December 28, 2013 are as follows: (dollars in thousands) January 3, 2015 December 28, 2013 Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tenant allowances and other receivables . . . . . . . . . . . . . . . . . $ 173,962 9,978 12,831 $ 169,862 9,260 24,197 Total gross receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 196,771 $ 203,319 Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . Sales returns reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,808) (400) (12,208) (9,308) (400) (9,708) Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 184,563 $ 193,611 Concentration of credit risk In each of fiscal 2014, 2013, and 2012, no one customer accounted for 10% or more of the Company’s consolidated net sales. Approximately 75.9% of the Company’s gross accounts receivable at January 3, 2015 and 75.2% at December 28, 2013 were from its ten largest wholesale customers. Of these customers, five had individual receivable balances in excess of 10% of gross accounts receivable at January 3, 2015, but none of these customers had receivable balances in excess of 14.1%. At December 28, 2013, three of the ten largest customers had individual receivable balances in excess of 10% of gross accounts receivable, but none of these customers had receivable balances in excess of 13.6%. F o r m 1 0 - K 59 46496_10k.pdf Page 63 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for doubtful accounts The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make payments and other actual and estimated deductions. 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. The Company also records reserves for potential returns based on historical experience. INVENTORIES Inventories, which consist primarily of finished goods, are stated at the lower of cost (first-in, first-out basis for wholesale inventory and average cost for retail inventories) or market. The Company adjusts for slow-moving inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The Company also adjusts its inventory to reflect estimated shrinkage based on historical trends. 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 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, and computer software from 3 to 7 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. GOODWILL AND OTHER INTANGIBLE ASSETS The Company’s goodwill balance is comprised of amounts related to the acquisition of Carter’s, Inc. by a predecessor company and the acquisition of Bonnie Togs. The goodwill balances have indefinite useful lives and are not deductible for income tax purposes. The Company’s other intangible assets are comprised of tradenames and non-compete agreements. The tradenames include Carter’s, OshKosh, Carter’s Watch the Wear, H.W. Carter & Sons, and the Carter’s tradename in the country of Chile. The Carter’s and OshKosh tradenames have indefinite useful lives. The Carter’s Watch the Wear and H.W. Carter & Sons have definite lives and are being amortized on an accelerated basis over three years. The Carter’s tradename in Chile has a definite life and is being amortized over a period of 20 years. The Bonnie Togs non-compete agreements for certain executives were amortized over four years through fiscal 2014. 60 46496_10k.pdf Page 64 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 future cash flows, discount rates, and, in the case of tradenames, royalty rates. Based upon the Company’s most recent assessment, performed as of January 3, 2015, there was no impairment in the value of goodwill or indefinite-lived tradename assets and no reporting units were at risk. Goodwill The Company performs impairment tests of its goodwill at the reporting unit level. Both qualitative and quantitative methods may be used to assess for impairment, including the use of discounted cash flows (“income approach”) and relevant data from guideline public companies (“market approach”). The Company may utilize a qualitative assessment to determine if it is “more likely than not” that the fair value of the reporting unit is less than its carrying value. If so, the two-step goodwill impairment test is required to be performed. If not, no further testing is required and the Company documents the relevant qualitative factors that support the strength in its fair 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. The first step of a quantitative assessment, where one is deemed necessary, is to compare the fair value of the reporting unit to its carrying value, including goodwill. The Company uses a discounted cash flow model to determine the fair value, using assumptions consistent with those of hypothetical marketplace participants. If the fair value of a reporting unit is less than its carrying value, the second step of the impairment test must be performed. The second step compares the implied fair value of the reporting unit goodwill with the carrying value of that goodwill, in order to determine the amount of the impairment loss and charge to the consolidated statement of operations. 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. F o r m 1 0 - K 61 46496_10k.pdf Page 65 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) IMPAIRMENT OF OTHER LONG-LIVED ASSETS The Company reviews other long-lived assets, including 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 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. DEFERRED DEBT ISSUANCE COSTS Debt issuance costs associated with the Company’s secured revolving credit facility and senior notes are deferred and amortized to interest expense over the term of the related debt using the effective interest method. 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. Level 2: Quoted prices for similar assets and liabilities in active markets or inputs that are observable. Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. The Company measures its contingent consideration liability, pension assets, and deferred compensation plan investment assets at fair value, as disclosed in the accompanying notes to the consolidated financial statements. 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 fair value of the Company’s total outstanding borrowings would have been disclosed as a Level 2 liability in the fair value hierarchy, had they been measured at fair value. The fair values are disclosed in the accompanying notes to the consolidated financial statements. REVENUE RECOGNITION Revenues consist of sales to customers, net of returns, accommodations, allowances, deductions, and cooperative advertising. The Company considers revenue realized or realizable and earned when the product has been shipped, when title passes, when all risks and rewards of ownership have transferred, the sales price is fixed or determinable, and collectibility is reasonably assured. In certain cases, in which the Company retains the risk of loss during shipment, revenue recognition does not occur until the goods have reached the specified customer. In the normal course of business, the Company grants certain accommodations and allowances to its wholesale customers in order to assist these customers with inventory clearance and promotions. Such amounts are reflected as a reduction of net sales and are recorded based on agreements with customers, historical trends, and annual forecasts. 62 46496_10k.pdf Page 66 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 $3.9 million, $3.9 million, and $4.6 million for fiscal 2014, 2013, and 2012, respectively, as a component of selling, general, and administrative expenses on the accompanying consolidated statements of operations, rather than as a reduction of revenue. Amounts determined to be in excess of the fair value of these arrangements are recorded as a reduction of net sales. Retail store revenues are recognized at the point of sale. The Company reduces revenue for estimated customer returns and deductions. ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS Shipping and handling costs include related labor costs, third-party shipping costs, shipping supplies, and certain distribution overhead. Such costs are absorbed by the Company and are included in selling, general, and administrative expenses. These costs amounted to approximately $72.1 million, $59.1 million, and $52.2 million for fiscal 2014, 2013, and 2012, respectively. F o r m 1 0 - K With respect to the freight component of the Company’s shipping and handling costs, certain customers arrange for shipping and pay the related freight costs directly to third parties. However, in the event that the Company arranges and pays the freight for these customers and bills them for this service, such amounts billed are included in revenue and the related cost is charged to cost of goods sold. In addition, shipping and handling costs billed to the Company’s eCommerce customers are included in revenue and the related cost is charged to cost of goods sold. Amounts billed to customers for such costs were approximately $12.3 million, $12.1 million, and $9.3 million for fiscal years 2014, 2013, and 2012, respectively. ROYALTIES AND LICENSE FEES The Company licenses the Carter’s, Just One You, Precious Firsts, Child of Mine, OshKosh B’gosh, OshKosh, and Genuine Kids from OshKosh trademarks to other companies for use on baby and young children’s products, including bedding, outerwear, sleepwear, shoes, underwear, socks, room décor, toys, stationery, hair accessories, furniture, and related products. 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. 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. 63 46496_10k.pdf Page 67 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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: Volatility — This is a measure of the amount by which a stock price has fluctuated or is expected to fluctuate. The Company uses actual monthly historical changes in the market value of its stock covering the expected life of 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 the related compensation expense. Dividend yield — The Company estimates a dividend yield based on the current dividend amount as a percentage of the current stock price. An increase in the dividend yield will decrease the fair value of the stock option and the related compensation expenses. Forfeitures — The Company estimates forfeitures of stock-based awards based on historical experience and expected future activity. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation expense and the related amount recognized in the audited consolidated statements of operations. Time-Based Restricted Stock Awards The fair value of time-based restricted stock awards is determined based on the quoted closing price of the Company’s common stock on the date of grant and is recognized as compensation expense over the vesting term of the awards, net of estimated forfeitures. Performance-Based Restricted Stock Awards The Company accounts for its performance-based restricted stock awards based on the quoted closing price of the Company’s common stock on the date of grant and records stock-based compensation expense over the vesting term of the awards based on the probability that the performance criteria will be achieved. The Company reassesses the probability of vesting at each reporting period and prospectively adjusts stock-based compensation expense based on its probability assessment. Stock Awards The fair value of stock granted to non-management board members is determined based on the quoted closing price of the Company’s common stock on the date of grant. The Company records the stock-based compensation expense immediately as there are no vesting terms. 64 46496_10k.pdf Page 68 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) INCOME TAXES The accompanying consolidated financial statements reflect current and deferred tax provisions. The deferred tax provision is determined under the liability method. Deferred tax assets and liabilities are recognized based on differences between the book and tax bases of assets and liabilities using presently enacted tax rates. Valuation allowances are established when it is “more likely than not” that a deferred tax asset will not be recovered. The provision for income taxes is the sum of the amount of income taxes paid or payable for the year as determined by applying the provisions of enacted tax laws to the taxable income for that year, the net change during the year in deferred tax assets and liabilities, and the net change during the year in any valuation allowances. The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting dates. The Company determines whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. For those tax positions where it is not “more likely than not” that a tax benefit will be sustained, no tax benefit is recognized. Where applicable, associated interest and penalties are also recorded. Interest and penalties, if any, are recorded within the provision for incomes taxes in the consolidated statements of operations and are classified on the consolidated balance sheets with the related liability for uncertain tax contingency liabilities. SUPPLEMENTAL CASH FLOW INFORMATION Interest paid in cash approximated $26.1 million, $3.8 million, and $6.0 million for fiscal years 2014, 2013, and 2012, respectively. Income taxes paid in cash approximated $95.8 million, $83.3 million and $97.4 million for the fiscal years 2014, 2013, and 2012, respectively. Additions to property, plant and equipment of approximately $2.0 million, $17.8 million and $6.6 million were excluded from capital expenditures on the Company’s consolidated statements of cash flows for fiscal years 2014, 2013 and 2012, respectively, since these amounts were accrued and unpaid at the end of each respective fiscal year. EARNINGS PER SHARE The Company calculates basic and diluted net income per common share under the two-class method for unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid). Basic net income per share is calculated by dividing net income for the period by the weighted-average common shares outstanding for the period. Diluted net income per share includes the effect of dilutive instruments and uses the average share price for the period in determining the number of shares that are to be added to the weighted-average number of shares outstanding. OPEN MARKET REPURCHASES OF COMMON STOCK Shares of the Company’s common stock that are repurchased (“buy back”) by the Company through open market transactions are retired. Through the end of fiscal 2014, all such open market repurchases have been at prices that exceeded the par value of the repurchased common stock, and the amounts of the purchase prices that exceeded par value were charged to additional paid-in capital or to retained earnings if the balance in additional paid-in capital was not sufficient. 65 F o r m 1 0 - K 46496_10k.pdf Page 69 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) EMPLOYEE BENEFIT PLANS The Company has several defined benefit plans. Various actuarial methods and assumptions are used in determining net pension and post-retirement costs and obligations. Key assumptions include the discount rate used to determine the present value of future benefits and the expected long-term rate of return on plan assets. The over-funded or under-funded status of the defined benefit plans is recorded as an asset or liability on the consolidated balance sheet. The gains or losses that arise during the period are recognized as a component of comprehensive income, net of tax. These costs are then subsequently recognized as components of net periodic benefit cost in the consolidated statements of operations. FACILITY CLOSURE AND OFFICE CONSOLIDATION The Company records severance costs when the appropriate notifications have been made to affected employees or when the decision is made, if the benefits are contractual. When employees are required to work for a period before termination, the severance costs are recognized over the required service period. Relocation and recruitment costs are expensed as incurred. For operating leases, lease termination costs are recognized at fair value at the date the Company ceases to use the leased property and adjusted for the effects of deferred items recognized under the lease and reduced by estimated sub-lease rental income. Useful lives assigned to fixed assets at the facility to be closed are revised based on the specifics of the exit plan, resulting in accelerated depreciation expense. LEASES AND DEFERRED RENT The Company enters into a significant number of lease transactions related to properties for its retail stores in addition to leases for offices, distribution facilities, and other uses. The lease agreements may contain provisions related to allowances for property improvements, rent escalation, and free rent periods. Substantially all of these leases are classified as operating leases for accounting purposes. For property improvement allowances, the Company records a deferred lease credit on the consolidated balance sheet and amortizes the deferred lease credit as a reduction of rent expense over the terms of the applicable lease. For scheduled rent escalation clauses during the lease term, the Company records rent expense on a straight-line basis over the term of the lease. The difference between the rent expense and the amount payable under the lease is included within the Company’s liabilities on the consolidated balance sheet. The term of the lease over which the Company amortizes allowances and minimum rental expenses on a straight-line basis begins on the date of initial possession, which is generally when the Company enters the space and/or begins construction. Where leases provide for contingent rents, which are generally determined as a percentage of gross sales, the Company records additional rent expense when management determines that achieving the specified level of revenue during the fiscal year is probable. Amounts accrued for contingent rent are included within the Company’s liabilities on the consolidated balance sheet. SEASONALITY The Company experiences seasonal fluctuations in its sales and profitability due to the timing of certain holidays and key retail shopping periods, typically resulting in lower sales and gross profit in the first half of its fiscal year. Accordingly, the Company’s results of operations during the first half of the year may not be indicative of the results for the full year. 66 46496_10k.pdf Page 70 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) RECENT ACCOUNTING PRONOUNCEMENTS In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue. The guidance is applicable to all contracts with customers regardless of industry-specific or transaction- specific fact patterns. Further, the guidance requires improved and additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. Pending any potential deferrals that may be forthcoming from the FASB, the standard is effective for the Company beginning in the first quarter of fiscal 2017, including interim periods within that fiscal year, and early adoption is not permitted. Upon becoming effective, the Company will apply the amendments in the updated standard either retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company is evaluating the impact of adopting this standard on its consolidated financial position, results of operations, and cash flows. NOTE 3—ACQUISITION OF BONNIE TOGS On June 30, 2011, the Company purchased all of the outstanding shares of capital stock of Bonnie Togs for total consideration of up to CAD $95 million, of which USD $61.2 million was paid in cash at closing. In accordance with the agreement, the sellers may be paid additional contingent consideration ranging from zero to CAD $35 million, if certain earnings targets for the period beginning July 1, 2011 and ending on June 27, 2015 are met. Sellers were entitled to receive a portion of the contingent consideration of up to CAD $25 million if interim earnings targets were met through June 2013 and June 2014, respectively. The Company made payments of approximately USD $14.7 million and USD $8.9 million related to the contingent consideration liability based on the achievement of interim earnings targets through June 2013 and 2014, respectively. The Sellers may receive the remaining portion of CAD $10.0 million in 2015 if certain earnings targets are met through June 2015. None of the interim payments are recoverable by the Company in the event of any failure to meet overall targets. CONTINGENT CONSIDERATION The Company determines the fair value of contingent consideration based upon a probability-weighted discounted cash flow analysis, reflecting a high probability that the earnings targets will be met. As of January 3, 2015, approximately $7.7 million of the contingent consideration liability is included in other current liabilities on the accompanying audited consolidated balance sheet. The following table summarizes the changes in the contingent consideration liability (dollars in thousands): Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,566 3,589 549 Balance at December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,704 (14,721) 2,825 (1,460) 16,348 (8,901) 1,348 (1,084) Balance at January 3, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,711 67 F o r m 1 0 - K 46496_10k.pdf Page 71 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4—PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment, net consists of the following: (dollars in thousands) January 3, 2015 December 28, 2013 Fixtures, equipment, computer hardware and software . . . . . . . . . . . . . . . . . . . . . . . . . . Land, buildings, and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325,852 220,995 12,089 19,172 $ 269,515 207,376 12,018 46,954 Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578,108 (245,011) 535,863 (227,978) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 333,097 $ 307,885 Depreciation and amortization expense was approximately $58.5 million, $54.7 million, and $39.5 million for fiscal years 2014, 2013 and 2012, respectively. NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS Acquisition of Tradenames In December 2014, the Company acquired the exclusive rights to the Carter’s brands including trademark registrations in Chile. The Company acquired these rights in order to freely operate in Chile by offering products and service under the Carter’s brand. The total consideration paid was approximately $3.6 million in cash and was accounted for as an asset acquisition. These tradenames are being amortized over 20 years using a straight- line method. In June 2013, the Company acquired worldwide rights to the Carter’s Watch the Wear and H.W. Carter & Sons brands, including trademark registrations. The Company acquired these worldwide rights for defensive purposes to reduce brand confusion and facilitate expansion in certain key international markets. The total consideration paid was approximately $38.0 million in cash and was accounted for as an asset acquisition. These tradenames are being amortized over three years, using an accelerated amortization method. 68 46496_10k.pdf Page 72 F o r m 1 0 - K CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued) Balance Sheet Components The Company’s goodwill and other intangible assets were as follows: (dollars in thousands) January 3, 2015 December 28, 2013 Weighted- average useful life Gross amount Accumulated amortization Net amount Gross amount Accumulated amortization Net amount Carter’s goodwill (1) . . . . . . . Indefinite $136,570 45,405 Bonnie Togs goodwill (2) . . . Indefinite $ — $136,570 45,405 — $136,570 49,507 $ — $136,570 49,507 — Total goodwill . . . . . . . . . . . . $181,975 $ — $181,975 $186,077 $ — $186,077 Carter’s tradename . . . . . . . . Indefinite $220,233 OshKosh tradename . . . . . . . . Indefinite 85,500 41,557 Other tradenames (3) . . . . . . . 3-20 years Bonnie Togs tradename (2) 516 2 years . . $ — $220,233 85,500 11,532 — — 30,025 516 $220,233 85,500 38,007 562 $ — $220,233 85,500 24,419 — — 13,588 562 Total tradenames . . . . . . . . . . Non-compete 347,806 30,541 317,265 344,302 14,150 330,152 agreements (2) . . . . . . . . . . 4years 257 225 32 280 174 106 Total tradenames and other intangibles, net . . . . . . . . . . $348,063 $30,766 $317,297 $344,582 $14,324 $330,258 (1) $45.9 million of which relates to the Carter’s wholesale segment, $82.0 million of which relates to the Carter’s retail segment, and $8.6 million of which relates to the international segment. (2) Relates to the international segment. The change in the gross amount of goodwill and other intangible assets reflects foreign currency translation adjustments for the applicable periods. (3) Relates to the acquisition of rights to the Carter’s brand in Chile in December 2014 and the Carter’s Watch the Wear and H.W. Carter & Sons brands worldwide in June 2013. Amortization expense for intangible assets subject to amortization was approximately $16.5 million, $13.8 million, and $0.4 million for fiscal years 2014, 2013 and 2012, respectively. The estimated future amortization expense is approximately $6.4 million for fiscal 2015, $1.9 million for fiscal 2016, and $0.2 million for each fiscal year 2017 through 2019. 69 46496_10k.pdf Page 73 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6—ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME Accumulated other comprehensive (loss) income is summarized as follows: (dollars in thousands) Pension liability adjustment Post-retirement liability adjustment Cumulative translation adjustment Accumulated other comprehensive (loss) income Balance at December 31, 2011 . . . . . . . . . . . . . Current year change . . . . . . . . . . . . . . . . . . . . . . $ (9,100) $ (1,163) $ 942 182 (3,124) $ 1,058 Balance at December 29, 2012 . . . . . . . . . . . . . Current year change . . . . . . . . . . . . . . . . . . . . . . Balance at December 28, 2013 . . . . . . . . . . . . . Current year change . . . . . . . . . . . . . . . . . . . . . . (10,263) 6,238 (4,025) (4,963) 1,124 371 1,495 (147) (2,066) (5,486) (7,552) (7,845) (11,282) 77 (11,205) 1,123 (10,082) (12,955) Balance at January 3, 2015 . . . . . . . . . . . . . . . . $ (8,988) $ 1,348 $ (15,397) $ (23,037) As of January 3, 2015, and December 28, 2013, the cumulative pension liability adjustments are net of tax effect, $5.3 million and $2.4 million, respectively. As of January 3, 2015 and December 28, 2013, the post-retirement liability adjustments are, net of tax effect, approximately $0.8 million and $0.9 million, respectively. For the fiscal years ended January 3, 2015 and December 28, 2013, amounts reclassified from accumulated other comprehensive loss to the consolidated statements of operations consisted of amortization of actuarial gains and losses related to the Company’s defined benefit retirement plans. Such amortization amounts are included in the net periodic cost or benefit recognized for these plans during the respective fiscal year. See the Employee Benefit Plans footnote for additional details. Also, during the fiscal year ended January 3, 2015, approximately $0.1 million was reclassified from cumulative translation adjustment into other expense, net on the consolidated statement of operations as a result of the completion of the Company’s exit from retail operations in Japan. NOTE 7—LONG-TERM DEBT Long-term debt consisted of the following: (dollars in thousands) January 3, 2015 December 28, 2013 Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Secured revolving credit facility . . . . . . . . . . . . . . . . . $ 400,000 186,000 $ 400,000 186,000 Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . $ 586,000 $ 586,000 SENIOR NOTES On August 12, 2013, the Company’s 100% owned subsidiary, The William Carter Company (“TWCC”) issued $400 million principal amount of senior notes (the “senior notes”) at par, bearing interest at a rate of 5.25% per annum, and maturing on August 15, 2021, all of which were outstanding as of January 3, 2015. At issuance, TWCC received net proceeds from the offering of the senior notes of approximately $394.2 million, after deducting bank fees. Approximately $7.0 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. 70 46496_10k.pdf Page 74 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7—LONG-TERM DEBT (Continued) The senior notes are unsecured and are fully and unconditionally guaranteed by Carter’s, Inc. and certain subsidiaries of TWCC. The guarantor subsidiaries are 100% owned directly or indirectly by Carter’s, Inc. and all guarantees are joint, several and unconditional. At any time prior to August 15, 2017, TWCC may redeem all or part of the senior notes at 100% of the principal amount redeemed plus an applicable premium and accrued and unpaid interest. On and after August 15, 2017, TWCC may redeem all or part of the senior notes at the redemption prices (expressed as percentages of principal amount of the senior notes to be redeemed) set forth below, plus accrued and unpaid interest. The redemption price applicable where the redemption occurs during the twelve-month period beginning on August 15 of each of the years indicated is as follows: Year 2017 . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . 2019 and thereafter . . . . . . . . . . . . . . . . . Percentage 102.63% 101.31% 100.00% In addition, until August 15, 2016, TWCC may, at its option, redeem up to 35% of the aggregate principal amount of the senior notes at a redemption price equal to 105.25% of the aggregate principal amount, plus accrued and unpaid interest, subject to certain terms, with the proceeds of certain equity offerings. 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, TWCC will be required to make an offer to purchase the senior notes at 101% of their principal amount. In addition, if TWCC or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances TWCC will be required to use the net proceeds to make an offer to purchase the senior notes at 100% of their principal amount. The indenture 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, assume or guarantee additional indebtedness; (b) issue disqualified stock and preferred stock; (c) pay dividends or make distributions or other restricted payments; (d) prepay, redeem or repurchase certain debt; (e) make loans and investments (including joint ventures); (f) incur liens; (g) create restrictions on the payment of dividends or other amounts from restricted subsidiaries that are not guarantors of the notes; (h) sell or otherwise dispose of assets, including capital stock of subsidiaries; (i) consolidate or merge with or into, or sell substantially all of TWCC’s assets to, another person; (j) designate subsidiaries as unrestricted subsidiaries; and (k) enter into transactions with affiliates. Specific provisions restrict the ability of the Company’s operating subsidiary, TWCC, from paying cash dividends to Carter’s, Inc. in excess of $100.0 million plus an additional amount that builds based on 50% of our consolidated net income on a cumulative basis beginning with the third fiscal quarter of 2013 and subject to certain conditions, unless TWCC and its consolidated subsidiaries meet a leverage ratio requirement under the indenture, which could restrict Carter’s, Inc. from paying cash dividends on our common stock. Additionally, the 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% 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. TWCC completed the required registered exchange offer during fiscal 2014. F o r m 1 0 - K 71 46496_10k.pdf Page 75 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7—LONG-TERM DEBT (Continued) SECURED REVOLVING CREDIT FACILITY On October 15, 2010, the Company entered into a $375 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) secured revolving credit facility with Bank of America as sole lead arranger and administrative agent, JP Morgan Chase Bank as syndication agent, and other financial institutions. On December 22, 2011, the Company amended and restated the secured revolving credit facility to, among other things, provide a U.S. dollar secured revolving facility of $340 million (including a $130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) and a $35 million multicurrency secured revolving facility (including a $15 million sub-limit for letters of credit and a swing line sub-limit of $5 million), which is available for borrowings by either TWCC or its Canadian subsidiary, in U.S. dollars or Canadian dollars. On August 31, 2012, the Company and lenders amended and restated the secured revolving credit facility to, among other things, improve interest rates applicable to pricing, extend the maturity of the facility, and allow borrowings in currencies other than U.S. dollars or Canadian dollars subject to the consent of all multicurrency lenders. The aggregate principal amount of the facility remained unchanged at $375 million consisting of a $340 million U.S. dollar secured revolving credit facility and a $35 million multicurrency secured revolving credit facility (although the sub-limit for U.S. dollar letters of credit was increased to $175 million). In connection with the amendment, the Company recorded approximately $1.9 million in debt issuance costs which, together with the existing unamortized debt issuance costs, is being amortized over the new remaining term of the facility (five years). The secured revolving credit facility expires August 31, 2017. As of January 3, 2015, the Company had approximately $186.0 million in outstanding borrowings under its secured revolving credit facility, exclusive of $6.5 million of outstanding letters of credit. Amounts outstanding under the secured revolving credit facility currently accrue interest at a LIBOR rate plus 2.00%, which, as of January 3, 2015, was 2.17%. As of January 3, 2015, there was approximately $182.5 million available for future borrowing. Pricing Options The secured revolving credit facility provides for different pricing options based on, among other things, the currency being borrowed and the Company’s leverage. Amounts outstanding under the secured revolving credit facility as of January 3, 2015 were accruing interest at a LIBOR rate plus 2.00%. Covenants The secured revolving credit facility contains and defines financial covenants, including a lease adjusted leverage ratio (defined as, with certain adjustments, the ratio of the Company’s consolidated indebtedness plus six times rent expense to consolidated net income before interest, taxes, depreciation, amortization, and rent expense (“EBITDAR”)) to exceed (x) if such period ends on or before December 31, 2016, 3.75:1.00 and (y) if such period ends after December 31, 2016, 3.50:1.00; and 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)), for any such period to be less than 2.50:1.00. Provisions in the secured credit facility currently restrict the ability of the Company’s operating subsidiary, TWCC, from paying cash dividends to the parent company, Carter’s, Inc., in excess of $15.0 million unless TWCC and its consolidated subsidiaries meet certain leverage ratio and minimum availability requirements under the credit facility, which could restrict Carter’s, Inc. from paying cash dividends on our common stock. As of January 3, 2015, the Company was in compliance with its financial debt covenants under the secured revolving credit facility. 72 46496_10k.pdf Page 76 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8—COMMON STOCK SHARE REPURCHASES In the second quarter of fiscal 2013, the Company’s Board of Directors authorized the repurchase of shares in an amount up to $300 million, inclusive of amounts remaining under previous authorizations. In the third quarter of 2013, the Board approved an additional $400 million share repurchase authorization. The total remaining capacity under the repurchase authorizations as of January 3, 2015, was approximately $185.1 million. The authorizations have no expiration date. During fiscal 2014 and 2013, the Company repurchased shares on the open market and acquired shares under an accelerated stock repurchase program. Open Market Purchases During the fiscal year ended January 3, 2015, the Company repurchased and retired 1,111,899 shares, in open market transactions, with an average share price of $73.84 for an aggregate cost of $82.1 million. During the fiscal year ended December 28, 2013, the Company repurchased and retired 816,402 shares, in open market transactions, with an average share price of $66.31 for an aggregate cost of $54.1 million. Future repurchases may occur from time to time in the open market, in negotiated transactions, or otherwise. The timing and amount of any repurchases will be determined by the Company’s management, based on its evaluation of market conditions, share price, other investment priorities, and other factors. F o r m 1 0 - K Accelerated Stock Repurchase Program On August 29, 2013, the Company entered into a $300 million fixed-dollar uncollared accelerated stock repurchase (“ASR”) agreement (the “Uncollared ASR Agreement) and a $100 million fixed-dollar collared accelerated stock repurchase agreement (the “Collared ASR Agreement”), each with JPMorgan Chase Bank, N.A. (“JPMorgan”). Under the Uncollared ASR Agreement, the Company paid $300 million from cash on hand to JPMorgan to repurchase outstanding shares of the Company’s common stock. Under the Collared ASR Agreement, the Company paid $100 million from cash on hand to JPMorgan to repurchase outstanding shares of the Company’s common stock. Both of the ASR Agreements were settled during January 2014. As of the date of settlement of the ASR Agreements, approximately 5.6 million shares had been received with a fair market value, at trade dates, of approximately $398.7 million. All shares received under the ASR Agreements were retired upon receipt. The specific number of shares that the Company ultimately repurchased was determined at the date of the settlement of the ASR Agreements based, generally, on the daily volume-weighted average share price of the Company’s common stock during the term of the ASR Agreements, less an agreed discount. For shares repurchased under the Collared ASR Agreement, the amount of shares was subject to additional provisions that established a minimum and maximum number of repurchased shares. Such minimum and maximum share numbers were based, generally, on the daily volume-weighted average share price of the Company’s common stock over the period during which JPMorgan established an initial hedge position. The ASR Agreements were treated as equity classified forward contracts indexed to the Company’s own stock. 73 46496_10k.pdf Page 77 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8—COMMON STOCK (Continued) DIVIDENDS In fiscal 2014, the Company’s Board of Directors paid quarterly cash dividends of $0.19 per share during all four quarters. Future declarations of dividends and the establishment of future record and payment dates are at the discretion of the Company’s Board of Directors based on a number of factors, including the Company’s future financial performance and other investment priorities. Provisions in the Company’s secured revolving credit facility and indenture governing its senior notes could have the effect of restricting the Company’s ability to pay future cash dividends on or make future repurchases of its common stock, as further described in the Long-Term Debt note. NOTE 9—STOCK-BASED COMPENSATION Under the Company’s Amended and Restated Equity Incentive Plan (the “Plan”), the Compensation Committee of the Board of Directors may award incentive stock options, stock appreciation rights, restricted stock, unrestricted stock, stock deliverable on a deferred basis (including restricted stock units), and performance-based stock awards. At the Company’s May 13, 2011 shareholders’ meeting, the shareholders approved an amendment to the Plan to (i) increase the maximum number of shares of stock available under the existing Plan by 3,725,000 shares from 12,053,392 shares to 15,778,392 shares and (ii)eliminate the Company’s ability to grant cash awards and provide tax gross-ups under the Plan. As of January 3, 2015, there were 2,395,041 shares available for grant under the Plan. The Plan makes provision for the treatment of awards upon termination of service or in the case of a merger or similar corporate transaction. Participation in the Plan is limited to members of the Company’s board of directors, executive officers and other key employees. The limit on shares available under the Plan, the individual limits, and other award terms are subject to adjustment to reflect stock splits or stock dividends, combinations, and certain other events. All stock options issued under the Plan expire no later than ten years from the date of grant. The Company believes that the current level of authorized shares is sufficient to satisfy future option exercises. The Company recorded stock-based compensation cost as follows: (dollars in thousands) Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock: For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 $ 4,672 $ 4,728 $ 4,093 Time-based awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance-based awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,018 4,827 1,081 6,732 4,127 453 5,376 2,395 1,185 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,598 $ 16,040 $ 13,049 All stock-based compensation expense was reflected as a component of selling, general, and administrative expenses, where participants’ other compensation expenses are also recorded. 74 46496_10k.pdf Page 78 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9—STOCK-BASED COMPENSATION (Continued) STOCK OPTIONS Stock options vest in equal annual installments over a four-year period. The Company issues new shares to satisfy stock option exercises. Changes in the Company’s stock options for the fiscal year ended January 3, 2015 were as follows: Number of shares Weighted- average exercise price Weighted- average remaining contractual terms (years) Aggregate intrinsic value (in thousands) Outstanding, December 28, 2013 . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,677,741 $ $ 228,700 (287,511) $ (129,840) $ (2,700) $ Outstanding, January 3, 2015 . . . . . . . . . . . . . . . . . . . . . 1,486,390 Vested and Expected to Vest, January 3, 2015 . . . . . . . . Exercisable, January 3, 2015 . . . . . . . . . . . . . . . . . . . . . . 1,419,359 867,115 $ $ $ 35.37 68.73 31.53 49.50 47.85 39.99 39.20 28.58 F o r m 1 0 - K 6.32 6.34 5.07 $ $ $ 68,389 66,433 49,786 The intrinsic value of stock options exercised during the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012 was approximately $12.9 million, $30.0 million, and $7.2 million, respectively. At January 3, 2015, there was approximately $7.1 million of unrecognized compensation cost (net of estimated forfeitures) related to stock options which is expected to be recognized over a weighted-average period of approximately 2.4 years. The table below presents the assumptions used to calculate the fair value of options granted in each of the respective fiscal years: For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average fair value of options granted . . . . . . . . . . . . . . . . . . . . . 30.85% 1.82% 6.0 1.11% 33.15% 1.15% 6.0 0.91% $ 19.86 $ 20.21 34.74% 1.37% 5.9 — $ 15.28 RESTRICTED STOCK AWARDS Restricted stock awards issued under the Plan vest based upon continued service or performance targets. 75 46496_10k.pdf Page 79 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9—STOCK-BASED COMPENSATION (Continued) The following table summarizes activity related to all restricted stock awards during the fiscal year ended January 3, 2015: Restricted stock awards Weighted- average grant-date fair value Outstanding, December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44.87 786,189 $ 68.96 190,109 (184,133) $ 42.24 (117,290) $ 50.85 Outstanding, January 3, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674,875 $ 51.34 Time-based Restricted Stock Awards Restricted stock awards vest in equal annual installments or cliff vest after a three- or four-year period. During fiscal year 2013, a total of 237,355 shares of restricted stock vested with an weighted-average fair value of $31.40 per share. During fiscal year 2012, a total of 194,455 shares of restricted stock vested with an weighted- average fair value of $27.90 per share. At January 3, 2015, there was approximately $11.3 million of unrecognized compensation cost (net of estimated forfeitures) related to restricted stock which is expected to be recognized over a weighted-average period of approximately 2.4 years. Performance-based Restricted Stock Awards Fiscal year Number of shares granted 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,000 118,200 61,200 Fair market value per share $42.61 $59.27 $68.49 As of January 3, 2015, the performance targets for the shares granted in 2011 and 2012 were met and these grants will become fully vested in the first quarter of fiscal 2015 if the remaining service requirements are also achieved. Vesting of shares granted in 2013 and 2014 is contingent upon meeting specific performance targets through fiscal 2015 and 2016, respectively. Currently, the Company believes these targets will be achieved and has recorded compensation expense based on the proration of the total ultimate expected value of the award. At January 3, 2015, there was approximately $5.2 million of unrecognized compensation cost (net of estimated forfeitures) related to performance-based restricted stock awards which is expected to be recognized over a weighted-average period of approximately 1.6 years. 76 46496_10k.pdf Page 80 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9—STOCK-BASED COMPENSATION (Continued) Stock Awards During fiscal years 2014, 2013 and 2012, the Company issued fully-vested shares of its common stock to non- management members of the Company’s board of directors, as follows: Number of shares issued Fair value per share Aggregate value (in thousands) 2012 . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . 21,708 16,173 14,859 $ $ $ 49.76 66.79 72.72 $ $ $ 1,080 1,080 1,081 The Company received no proceeds from the issuance of these shares. NOTE 10—EMPLOYEE BENEFIT PLANS The Company maintains a defined contribution plan, a deferred compensation plan, and two defined benefit plans. The two defined benefit plans include the OshKosh B’Gosh pension plan and a post-retirement life and medical plan. OSHKOSH B’GOSH PENSION PLAN Funded Status The retirement benefits under the OshKosh B’Gosh pension plan were frozen as of December 31, 2005. A reconciliation of changes in the projected pension benefit obligation and plan assets is as follows: (dollars in thousands) Change in projected benefit obligation: For the fiscal years ended January 3, 2015 December 28, 2013 Projected benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Projected benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Change in plan assets: Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unfunded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 53,386 2,488 9,420 (1,779) 63,515 49,618 4,645 (1,779) 52,484 11,031 $ $ $ $ $ 59,331 2,335 (6,490) (1,790) 53,386 45,774 5,634 (1,790) 49,618 3,768 F o r m 1 0 - K 77 46496_10k.pdf Page 81 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10—EMPLOYEE BENEFIT PLANS (Continued) The unfunded status is included in other long-term liabilities in the Company’s consolidated balance sheet. The Company does not expect to make any contributions to the OshKosh defined benefit plan during fiscal 2015 as the plan’s funding exceeds the minimum funding requirements. The accumulated benefit obligation is equal to the projected benefit obligation as of January 3, 2015 and December 28, 2013 because the plan is frozen. The actuarial loss incurred in fiscal year 2014 was primarily attributable to a lower discount rate, as well as changes in the mortality assumptions. Net Periodic Pension (Benefit) Cost The net periodic pension (benefit) cost included in the statement of operations was comprised of: (dollars in thousands) For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . Recognized actuarial loss (a) . . . . . . . . . . . . . . $ $ 2,488 (3,193) 85 $ 2,335 (3,058) 831 2,388 (2,852) 710 Net periodic pension (benefit) cost . . . . . . . $ (620) $ 108 $ 246 (a) Represents pre-tax amounts reclassified from accumulated other comprehensive loss. For fiscal 2015, approximately $0.6 million is expected to be reclassified from accumulated other comprehensive loss to a component of net periodic pension cost. Assumptions The actuarial computations utilized the following assumptions, using year-end measurement dates: Benefit obligation 2014 2013 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.00% 4.75% Net periodic pension cost 2014 2013 2012 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected long-term rate of return on assets . . . . . . . . . . . . . . . . . . . . . 4.75% 4.00% 4.50% 6.50% 7.00% 7.00% The discount rates used at January 3, 2015, December 28, 2013, and December 29, 2012, were determined with consideration given to the Citigroup Pension Discount and Liability index and the Barclay Capital Aggregate AA Bond index, adjusted for the timing of expected plan distributions. The Company believes these indexes reflect a risk-free rate consistent with a portfolio of high quality debt instruments with maturities that are comparable to the timing of the expected payments under the plan. The expected long-term rate of return assumption considers historic returns adjusted for changes in overall economic conditions that may affect future returns and a weighting of each investment class. A 0.25% change in the assumed discount rate would result in an increase or decrease in the amount of the pension plan’s projected benefit obligation of approximately $2.5 million. 78 46496_10k.pdf Page 82 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10—EMPLOYEE BENEFIT PLANS (Continued) The Company currently expects benefit payments for its defined benefit pension plans as follows for the next ten fiscal years; (dollars in thousands) Fiscal Year 2015 . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . 2020-2024 . . . . . . . . . . . . . . . . . $ 2,410 $ 1,980 $ 2,380 $ 2,240 $ 2,290 $14,670 Plan Assets The Company’s investment strategy is to invest in a well-diversified portfolio consisting of approximately 10 mutual funds or group annuity contracts that minimize concentration of risks by utilizing a variety of asset types, fund strategies, and fund managers. The target allocation for plan assets is 40% equity securities, 50% bond funds, and 10% real estate investments. Based on actual returns over a long-term basis, the Company believes that a 6.5% annual return on plan assets can be achieved based on the current allocation and investment strategy. Equity securities primarily include funds invested in large-cap and mid-cap companies, primarily located in the United States, with up to 5% of the plan assets invested in international equities. Fixed income securities include funds holding corporate bonds of companies from diverse industries, and U.S. Treasuries. Real estate funds include investments in actively managed mutual funds that invest in real estate. The fair value of the Company’s pension plan assets at January 3, 2015 and December 28, 2013, by asset category, were as follows: F o r m 1 0 - K (dollars in thousands) Asset Category Cash and cash equivalents . . . . . . . . . . . Equity Securities: U.S. Large-Cap blend (a) . . . . . . . . . . . U.S. Large-Cap growth . . . . . . . . . . . . . U.S. Mid-Cap growth . . . . . . . . . . . . . . U.S. Small-Cap blend . . . . . . . . . . . . . . International blend . . . . . . . . . . . . . . . . . Fixed income securities: Corporate bonds (b) . . . . . . . . . . . . . . . . Real estate (c) . . . . . . . . . . . . . . . . . . . . January 3, 2015 December 28, 2013 Total Level 1 Level 2 Total Level 1 Level 2 $ 133 $ 133 $ — $ 117 $ — $ 117 8,671 4,346 2,609 2,596 2,614 4,337 4,346 4,334 — — 2,609 — — 2,596 2,614 11,250 5,630 3,473 1,486 1,486 5,623 5,630 5,627 — — 3,473 — — 1,486 1,486 26,325 5,190 26,325 5,190 — — 21,257 4,919 21,257 4,919 — — $52,484 $45,541 $6,943 $49,618 $40,401 $9,217 (a) This category comprises low-cost equity index funds not actively managed that track the Standard & Poor’s 500 Index. (b) This category invests in both U.S. Treasuries and mid-term corporate debt from U.S. issuers from diverse industries. (c) This category represents an investment in a mutual fund that invests primarily in real estate securities, including common stocks, preferred stock and other equity securities issued by real estate companies. 79 46496_10k.pdf Page 83 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10—EMPLOYEE BENEFIT PLANS (Continued) POST-RETIREMENT LIFE AND MEDICAL PLAN Under a defined benefit plan frozen in 1991, the Company offers a comprehensive post-retirement medical plan to current and certain future retirees and their spouses. The Company also offers life insurance to current and certain future retirees. Employee contributions are required as a condition of participation for both medical benefits and life insurance and the Company’s liabilities are net of these expected employee contributions. Accumulated Post-Retirement Benefit Obligation The following is a reconciliation of the accumulated post-retirement benefit obligation (“APBO”) under this plan: For the fiscal years ended January 3, 2015 December 28, 2013 (dollars in thousands) APBO at beginning of period . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . Plan participants’ contribution . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 5,730 113 230 32 18 (501) (291) APBO at end of period . . . . . . . . . . . . . . . . . . . . . . . $ 5,331 $ 6,876 161 231 (716) 19 (563) (278) 5,730 Approximately $4.7 million and $5.1 million of the APBO at the end of fiscal 2014 and 2013, respectively, were classified as other long term liabilities in the Company’s consolidated balance sheets. Net Periodic Post-Retirement Benefit (Benefit) Cost The components of post-retirement benefit expense charged to the statement of operations were as follows: (dollars in thousands) For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 Service cost – benefits attributed to service during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113 $ 161 $ 135 Interest cost on accumulated post-retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization net actuarial gain (a) . . . . . . . . . . . . . . . . Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net periodic post-retirement benefit (income) 230 (206) (291) 231 (135) (278) 282 (84) — cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (154) $ (21) $ 333 (a) Represents pre-tax amounts reclassified from accumulated other comprehensive loss. For fiscal 2015, approximately $0.2 million is expected to be reclassified from accumulated other comprehensive loss as a credit to periodic net periodic pension cost. 80 46496_10k.pdf Page 84 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10—EMPLOYEE BENEFIT PLANS (Continued) Curtailment In fiscal 2014 and 2013, a curtailment gain was recognized as a result of the Company’s facility closures, which decreased the number of employees eligible for retiree medical benefits. Assumptions The actuarial computations utilized the following assumptions, using year-end measurement dates: Benefit obligation 2014 2013 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.50% 4.25% Net periodic pension cost 2014 2013 2012 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.25% 3.50% 4.00% The discount rates used at January 3, 2015, December 28, 2013, and December 29, 2012, were determined with primary consideration given to the Citigroup Pension Discount and Liability index adjusted for the timing of expected plan distributions. The Company believes this index reflects a risk-free rate with maturities that are comparable to the timing of the expected payments under the plan. The effects on the Company’s plan of all future increases in health care costs are borne primarily by employees; accordingly, increasing medical costs are not expected to have any material effect on the Company’s future financial results. The Company’s contribution for these post-retirement benefit obligations was approximately $0.5 million in each of the fiscal years 2014, 2013 and 2012. The Company expects that its contribution and benefit payments for post-retirement benefit obligations each year will be approximately $0.5 million for fiscal years 2015 and 2016 and $0.4 million for each fiscal year 2017 through 2019. For the five years subsequent to fiscal 2019, the aggregate contributions and benefit payments for post-retirement benefit obligations is expected to be approximately $1.7 million. The Company does not pre-fund this plan and as a result there are no plan assets. The measurement date used to determine the post-retirement benefit obligations is as of the end of the fiscal year. DEFERRED COMPENSATION PLAN The Company maintains a deferred compensation plan allowing voluntary salary and incentive compensation deferrals for qualifying employees as permitted by the Internal Revenue Code. Participant deferrals earn investment returns based on a select number of investment options, including equity, debt, and real estate mutual funds. The Company invests comparable amounts in marketable securities to mitigate the risk associated with the investment return on the employee deferrals. DEFINED CONTRIBUTION PLAN The Company also sponsors a defined contribution savings plan within the United States. This plan covers employees who are at least 21 years of age and have completed three months of service, during which at least 250 hours were served. The plan provides for a discretionary employer match. The Company’s expense for the defined contribution savings plan totaled approximately $10.5 million, $8.5 million, and $6.3 million for the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012, respectively. 81 F o r m 1 0 - K 46496_10k.pdf Page 85 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11—INCOME TAXES PROVISION FOR INCOME TAXES The provision for income taxes consisted of the following: (dollars in thousands) For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 Current tax provision: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,635 9,049 6,641 Total current provision . . . . . . . . . . . . . . . . . . . . . . $ 104,325 Deferred tax provision (benefit): Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total deferred provision . . . . . . . . . . . . . . . . . . . . . 5,519 41 (1,649) 3,911 $ $ $ $ 71,696 8,486 8,280 87,070 8,905 7,917 88,462 $ 103,892 $ 1,412 (942) 126 596 (7,815) (846) (990) (9,651) Total provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,236 $ 89,058 $ 94,241 The foreign portion of the tax position relates to Canadian and Hong Kong income taxes on the Company’s international operations and foreign tax withholdings related to the Company’s foreign royalty income. The components of income before income taxes were as follows: (dollars in thousands) For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 286,177 16,729 302,906 $ $ 223,907 25,558 249,465 $ $ 239,159 16,232 255,391 EFFECTIVE RATE RECONCILIATION The difference between the Company’s effective income tax rate and the federal statutory tax rate is reconciled below: For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 Statutory federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . State income taxes, net of federal income tax benefit . . . . . . . . . Impact of foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlement of uncertain tax positions . . . . . . . . . . . . . . . . . . . . . Acquisition expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 2.5% (1.2)% (0.6)% — % Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.7% 35.0% 2.5% (1.4)% (0.4)% — % 35.7% 35.0% 2.5% (0.7)% (0.5)% 0.6% 36.9% 82 46496_10k.pdf Page 86 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11—INCOME TAXES (Continued) The Company and its subsidiaries file income tax returns in the United States and in various states and local jurisdictions. The Company’s subsidiaries also file income tax returns in Canada (including various Canadian provinces), Hong Kong and Japan. The Internal Revenue Service initiated an income tax audit for fiscal 2011 in 2013 and expanded this audit to include fiscal 2012 and fiscal 2013 during 2014. As of January 3, 2015, the Company is not aware of any material payments that are expected to be made in the next year as a result of this audit. The federal statute of limitations for fiscal 2008 closed during the third quarter of fiscal 2012 and the federal statute of limitations for fiscal 2010 closed during the third quarter of 2014. In most cases, the Company is no longer subject to state and local tax authority examinations for years prior to fiscal 2010. DEFERRED TAXES Components of deferred tax assets and liabilities were as follows: (dollars in thousands) January 3, 2015 December 28, 2013 Deferred tax assets: Accounts receivable allowance . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Assets (Liabilities) 4,990 11,253 13,947 10,596 8,070 37,381 6,127 4,783 12,378 14,829 9,001 5,111 31,855 5,050 F o r m 1 0 - K Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,364 $ 83,007 Deferred tax liabilities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tradename and licensing agreements . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (70,510) (102,298) (4,467) $ (54,809) (108,155) (4,164) Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(177,275) $(167,128) The net deferred tax liability was classified on the Company’s consolidated balance sheets as follows: (dollars in thousands) January 3, 2015 December 28, 2013 Assets (Liabilities) Current net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . $ 36,625 (121,536) $ 37,313 (121,434) Total deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (84,911) $ (84,121) 83 46496_10k.pdf Page 87 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11—INCOME TAXES (Continued) The Company has not provided deferred taxes on undistributed earnings from its Canadian or Hong Kong subsidiaries, as the Company anticipates that these earnings will be reinvested indefinitely. Undistributed earnings from the Company’s Canadian and Hong Kong subsidiary at January 3, 2015 amounted to approximately $49.1 million and $10.3 million, respectively. These earnings have been reinvested in foreign operations and the Company does not currently plan to initiate any action that would result in these earnings being repatriated to the U.S. Because of the availability of foreign tax credits, it is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested indefinitely. UNCERTAIN TAX POSITIONS The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits: (dollars in thousands) Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions related to fiscal 2012 . . . . . . . . . . . . . . Additions for prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions for lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . Reductions for prior year tax settlements . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions related to fiscal 2013 . . . . . . . . . . . . . . Reductions for prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions for lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . Reductions for prior year tax settlements . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions related to fiscal 2014 . . . . . . . . . . . . . . Reductions for prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions for lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . Reductions for prior year tax settlements . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,345 2,384 1,020 (1,831) (155) $ 9,763 3,200 (375) (1,029) (377) $11,182 2,572 (471) (1,536) (436) Balance at January 3, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,311 As of January 3, 2015, the Company had gross unrecognized tax benefits of approximately $11.3 million, of which $8.2 million, if ultimately recognized, will affect the Company’s effective tax rate in the period settled. The Company has recorded tax positions for which the ultimate deductibility is more likely than not, but for which there is uncertainty about the timing of such deductions. Because of deferred tax accounting, changes in the timing of these deductions would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authorities. Included in the reserves for unrecognized tax benefits are approximately $1.8 million of reserves for which the statute of limitations is expected to expire within the next fiscal year. If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective tax rate for fiscal 2015 and the effective tax rate in the quarter in which the benefits are recognized. Also included in the reserves for unrecognized tax benefits are approximately $1.9 million of federal tax reserves applicable to the ongoing examination. Settlement of this audit may affect the Company’s annual effective tax rate for fiscal 2015 and the effective tax rate in the quarter in which the audit is effectively settled. 84 46496_10k.pdf Page 88 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11—INCOME TAXES (Continued) The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 2014, 2013, and 2012, interest expense recorded on uncertain tax positions was not significant. The Company had approximately $0.9 million and $0.8 million of interest accrued on uncertain tax positions as of January 3, 2015 and December 28, 2013, respectively. NOTE 12—EARNINGS PER SHARE The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding: Weighted-average number of common and common equivalent shares outstanding: Basic number of common shares outstanding . . . . . . Dilutive effect of equity awards . . . . . . . . . . . . . . . . Diluted number of common and common equivalent shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share: (dollars in thousands, except per share data) Basic net income per common share: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income allocated to participating securities . . . . . . . Net income available to common shareholders . . . . Basic net income per common share . . . . . . . . . . . . . Diluted net income per common share: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income allocated to participating securities . . . . . . . Net income available to common shareholders . . . . Diluted net income per common share . . . . . . . . . . . For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 52,614,425 479,114 56,931,216 590,951 58,217,503 851,684 53,093,539 57,522,167 59,069,187 F o r m 1 0 - K $ $ $ $ $ $ 194,670 (2,586) 192,084 3.65 194,670 (2,568) 192,102 3.62 $ $ $ $ $ $ 160,407 (2,144) 158,263 2.78 160,407 (2,126) 158,281 2.75 $ $ $ $ $ $ 161,150 (2,095) 159,055 2.73 161,150 (2,072) 159,078 2.69 Anti-dilutive shares excluded from dilutive earnings . . . . . . . . . . . . . . . . . . . per share calculations (1) 230,150 355,900 613,000 (1) The volume of antidilutive shares is, in part, due to the related unamortized compensation costs. In connection with the 2013 ASR Agreements discussed in the common stock footnote, the Company received one million additional shares in January 2014 for a total of approximately 5.6 million shares during fiscal 2014 and 2013 under the ASR program. The shares were retired upon receipt and, accordingly, reduced the Company’s weighted average shares outstanding for purposes of the calculation of earnings per share. 85 46496_10k.pdf Page 89 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12—EARNINGS PER SHARE (Continued) The Company evaluated the ASR Agreements for their potential dilution of earnings per share and determined, for all periods impacted by the ASR Agreements, that the Company would not have been required to deliver additional shares to JPMorgan based on the volume-weighted average prices calculated for all impacted periods. The Company determined that these shares would have had an anti-dilutive effect and excluded these shares from the diluted earnings per share calculation for all periods. NOTE 13—SEGMENT INFORMATION The Company reports segment information based upon a “management approach.” The management approach refers to the internal reporting that is used by management for making operating decisions and assessing the performance of the Company’s reportable segments. The Company reports its corporate expenses separately as they are not included in the internal measures of segment operating performance used by the Company to measure the underlying performance of its reportable segments. Segment results include the direct costs of each segment and all other costs are allocated based upon detailed estimates and analysis of actual time and expenses incurred to support the operations of each segment or units produced or sourced to support each segment’s revenue. Certain costs, including incentive compensation for certain employees, and various other general corporate costs that are not specifically allocable to segments, are included in corporate expenses below. Intersegment sales and transfers are recorded at cost and are treated as a transfer of inventory. The accounting policies of the segments are the same as those described in Note 2 to the consolidated financial statements. The Company’s reportable segments are Carter’s wholesale, Carter’s retail, OshKosh retail, OshKosh wholesale, and International. 86 46496_10k.pdf Page 90 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13—SEGMENT INFORMATION (Continued) The table below presents certain segment information for the periods indicated: For the fiscal years ended (dollars in thousands) January 3, 2015 % of Total December 28, 2013 % of Total December 29, 2012 % of Total Net sales: Carter’s Retail (a) . . . . . . . . . . . $1,087,165 Carter’s Wholesale . . . . . . . . . . 1,081,888 37.6% $ 954,160 37.4% 1,035,420 36.2% $ 818,909 981,445 39.2% Total Carter’s . . . . . . . . . 2,169,053 75.0% 1,989,580 75.4% 1,800,354 OshKosh Retail (a) . . . . . . . . . . OshKosh Wholesale . . . . . . . . . 335,140 73,201 Total OshKosh . . . . . . . . 408,341 International (b) . . . . . . . . . . . 316,474 11.6% 2.5% 14.1% 10.9% 289,311 74,564 363,875 285,256 11.0% 2.8% 13.8% 10.8% 283,343 79,752 363,095 218,285 34.4% 41.2% 75.6% 11.9% 3.3% 15.2% 9.2% Total net sales . . . . . . $2,893,868 100.0% $2,638,711 100.0% $2,381,734 100.0% Operating income (loss): % of segment net sales % of segment net sales % of segment net sales F o r m 1 0 - K Carter’s Retail (a) Carter’s Wholesale . . . . . . . . . . . . . . . . . . . . . $ 211,297 185,463 19.4% $ 181,169 185,501 17.1% 19.0% $ 145,940 172,673 17.9% Total Carter’s . . . . . . . . . . . 396,760 OshKosh Retail (a) . . . . . . . . . . OshKosh Wholesale . . . . . . . . . Total OshKosh . . . . . . . . . . International (b) (c) . . . . . . . . 8,210 8,842 17,052 39,470 18.3% 2.4% 12.1% 4.2% 12.5% 366,670 18.4% 318,613 (1,433) 9,796 (0.5)% 13.1% 8,363 2.3% (7,752) 4,086 (3,666) 40,641 14.2% 43,376 19.9% 17.8% 17.6% 17.7% (2.7)% 5.1% (1.0)% Corporate expenses (d) (e) . . . . . (119,937) (151,523) (96,337) Total operating income . . . . . . . . . . $ 333,345 11.5% $ 264,151 10.0% $ 261,986 11.0% (a) Includes eCommerce results. (b) Net sales include international retail, eCommerce, and wholesale sales. Operating income includes international licensing income. (c) Includes the following charges: (dollars in millions) For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 Revaluation of contingent consideration . . . . . . . . Exit from Japan retail operations . . . . . . . . . . . . . $ 1.3 $ 0.5 $ $ 2.8 4.1 $ 3.6 $ — (d) Corporate expenses include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, building occupancy, information technology, certain legal fees, consulting, and audit fees. 87 46496_10k.pdf Page 91 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13—SEGMENT INFORMATION (Continued) (e) Includes the following charges: (dollars in millions) For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 Office consolidation costs . . . . . . . . . . . . . . . . . . . Amortization of H.W. Carter and Sons $ 6.6 tradenames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16.4 Closure of distribution facility in Hogansville, GA (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.9 $ $ $ 33.3 13.6 $ 6.4 $ — 1.9 $ 3.1 (1) Continuing operating costs associated with the closure of the Company’s distribution facility in Hogansville, Georgia. ADDITIONAL DATA BY SEGMENT Inventory The table below represents inventory by segment: (dollars in thousands) For the fiscal years ended January 3, 2015 December 28, 2013 Carter’s Wholesale . . . . . . . . . . . . . . . . . . Carter’s Retail . . . . . . . . . . . . . . . . . . . . . . OshKosh Retail . . . . . . . . . . . . . . . . . . . . . OshKosh Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International $ 240,669 84,004 31,829 39,879 48,463 $ 232,419 79,451 28,690 30,977 46,217 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 444,844 $ 417,754 Wholesale inventories include inventory produced and warehoused for the retail segment. The table below represents consolidated net sales by product: (dollars in thousands) Baby . . . . . . . . . . . . . . . . . . . . . . . . . . Playclothes . . . . . . . . . . . . . . . . . . . . . Sleepwear . . . . . . . . . . . . . . . . . . . . . . Other (a) . . . . . . . . . . . . . . . . . . . . . . . For the fiscal years ended January 3, 2015 (53 weeks) 1,107,973 1,146,797 381,574 257,524 December 28, 2013 (52 weeks) December 29, 2012 (52 weeks) 975,374 1,074,581 366,289 222,467 865,446 989,371 340,715 186,202 Total net sales . . . . . . . . . . . . . . . . . . . 2,893,868 2,638,711 2,381,734 (a) Other product offerings include bedding, outwear, swimwear, shoes, socks, diaper bags, gift sets, toys, and hair accessories. 88 46496_10k.pdf Page 92 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13—SEGMENT INFORMATION (Continued) GEOGRAPHICAL DATA Revenue The Company’s international sales principally represent sales to customers in Canada. Such sales were 67.9% and 65.4% of total international sales in fiscal 2014 and 2013, respectively. Long-Lived Assets The following represents property, plant, and equipment, net, by geographic area: (dollars in thousands) United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Total . . . . . . . . . . . . . . . . . . . . . . . . . . . For the fiscal years ended January 3, 2015 December 28, 2013 $ $ 305,093 28,004 333,097 $ $ 282,517 25,368 307,885 Long-lived assets in the international segment relate principally to Canada. Long-lived assets in Canada were 98.1% and 91.8% of total international long-lived assets at the end of fiscal 2014 and 2013, respectively. NOTE 14—FAIR VALUE MEASUREMENTS The following table summarizes assets and liabilities measured at fair value on a recurring basis: (dollars in millions) Assets January 3, 2015 December 28, 2013 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7.6 $ — $ — $ 5.4 $ — $ — Liabilities Contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ 7.7 $ — $ — $ 16.3 INVESTMENTS The Company invests in marketable securities, principally equity based mutual funds, to mitigate the risk associated with the investment return on employee deferrals of compensation. All of the marketable securities purchased are included in other assets on the accompanying consolidated balance sheets. During fiscal 2014 and 2013, the gain on the mark to market of marketable securities was $0.4 million and $0.5 million, respectively. The fair value of the Company’s pension plan assets at January 3, 2015 and December 28, 2013, by asset category, are disclosed in the employee benefit plans footnote to the consolidated financial statements. F o r m 1 0 - K 89 46496_10k.pdf Page 93 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14—FAIR VALUE MEASUREMENTS (Continued) CONTINGENT CONSIDERATION The following summarizes the significant unobservable inputs for the Company’s Level 3 fair value measurements at January 3, 2015: (dollars in millions) Fair Value (USD) Valuation technique Contingent consideration . . . . .$ 7.7 Discounted cash flow Unobservable inputs Estimated contingent consideration payment Discount rate Probability assumption The following summarizes the significant unobservable inputs for the Company’s Level 3 fair value measurements at December December 28, 2013: (dollars in millions) Fair Value (USD) Valuation technique Contingent consideration . . . . .$ 16.3 Discounted cash flow Unobservable inputs Estimated contingent consideration payment Discount rate Probability assumption Amount (CAD) C$ 10 18% 100% Amount (CAD) C$ 20 18% 100% BORROWINGS As of January 3, 2015, the Level 2 fair value of the Company’s $186 million in borrowings under its secured revolving credit facility approximated carrying value. The fair value of the Company’s $400 million in senior notes was estimated by obtaining market quotes given the trading levels of other bonds of the same general issuer type and market perceived credit quality and is, therefore, within Level 2 of the fair value hierarchy. The fair value of the outstanding senior notes as of January 3, 2015 was approximately $414 million. 90 46496_10k.pdf Page 94 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15—OTHER CURRENT AND LONG-TERM LIABILITIES Other current liabilities consisted of the following: (dollars in thousands) January 3, 2015 December 28, 2013 $ Accrued bonuses and incentive compensation . . . . . . . . . . . . . . . . . . . . . Contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued workers’ compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued sales and use taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued gift certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued 401(k) contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued closure costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,875 7,711 692 2,662 8,106 5,318 3,576 10,100 10,073 835 29,780 $ 19,579 8,964 97 7,236 8,311 8,486 7,609 7,899 8,775 9,128 19,045 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,728 $ 105,129 Other long-term liabilities consisted of the following: (dollars in thousands) January 3, 2015 December 28, 2013 Deferred lease incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued workers’ compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OshKosh pension plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Post-retirement life and medical plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 67,205 40,656 — 4,717 11,031 12,230 4,731 8,388 1,947 68,876 31,821 7,384 — 3,768 11,947 5,055 6,225 104 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,905 $ 135,180 F o r m 1 0 - K 91 46496_10k.pdf Page 95 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16—FACILITY CLOSURE HOGANSVILLE DISTRIBUTION FACILITY In 2012, the Company announced its plan to close its Hogansville, Georgia distribution facility. In connection with this plan, the Company recorded approximately $1.9 million in closing-related charges in selling, general, and administrative expenses for the fiscal year ending December 28, 2013. There were no additional closing- related charges recorded for the fiscal year ending January 3, 2015. As of December 28, 2013, the restructuring reserve related to the closure of the Hogansville facility was approximately $1.3 million and was included in other current liabilities in the Company’s consolidated balance sheet. There was no ending liability amount as of January 3, 2015. The Hogansville facility was sold in the fourth quarter of 2014 for an amount that approximated carrying value. OFFICE CONSOLIDATION The Company consolidated the Shelton, Connecticut and Atlanta, Georgia offices, as well as certain functions from our other offices, into a new headquarters facility in Atlanta, Georgia. Approximately 175 employees were affected by this closure. In connection with this plan to consolidate into the new headquarters facility in Atlanta, the Company recorded approximately $6.6 million, $33.3 million, and $6.4 million in closing-related costs in fiscal years 2014, 2013, and 2012, respectively. The total amount of charges was included in selling, general, and administrative expenses and consisted of the following: (dollars in millions) For the fiscal years ended January 3, 2015 December 28, 2013 December 29, 2012 Other closure costs . . . . . . . . . . . . . . . . . . . . . . Severance and other benefits . . . . . . . . . . . . . . Accelerated depreciation . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 5.7 0.9 — 6.6 $ $ 24.5 4.8 4.0 33.3 $ $ 3.1 2.2 1.1 6.4 The following table summarizes the restructuring reserves related to the office consolidation as of January 3, 2015: (dollars in millions) Severance Other closure costs Total Balance at December 28, 2013 . . . . . . . . . . . . . . . Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.7 0.9 (4.8) — $ 1.7 5.7 (5.1) 0.5 $ 6.4 6.6 (9.9) 0.5 Balance at January 3, 2015 . . . . . . . . . . . . . . . . . $ 0.8 $ 2.8 $ 3.6 The severance reserve is included in other current liabilities and other closure costs are included in other long- term liabilities in the Company’s consolidated balance sheets. The Company has completed its consolidation efforts. The severance accrual is expected to be substantially paid during fiscal 2015. 92 46496_10k.pdf Page 96 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16—FACILITY CLOSURE (Continued) JAPAN RETAIL OPERATIONS In 2013, the Company made the decision to exit retail operations in Japan based on revised forecasts which did not meet the Company’s investment objectives. The Company recorded approximately $1.5 million in closing related costs for the fiscal year ended January 3, 2015. The Company recorded approximately $4.1 million in closing related costs for the fiscal year ended December 28, 2013, which included approximately $3.0 million in selling, general, and administrative expenses and $1.1 million in inventory write-offs recorded in cost of goods sold. The Company does not expect to incur any additional closing related costs after fiscal 2014 in connection with the exit of retail operations in Japan. The total amount of charges was included in selling, general, and administrative expenses and consisted of the following: (dollars in millions) For the fiscal years ended January 3, 2015 December 28, 2013 Severance and other benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accelerated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other closure costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.9 0.9 (0.3) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.5 $ 0.9 0.1 2.0 3.0 F o r m 1 0 - K The following table summarizes the restructuring reserves related to the exit of retail operations in Japan which are included in other current liabilities on the Company’s consolidated balance sheet as of January 3, 2015, (dollars in millions) Severance Other closure costs Total Balance at December 28, 2013 . . . . . . . . . . . . . . . Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at January 3, 2015 . . . . . . . . . . . . . . . . . . 0.9 0.9 (1.8) — 2.0 (0.3) (1.7) — 2.9 0.6 (3.5) — 93 46496_10k.pdf Page 97 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17—LEASE COMMITMENTS Rent expense under operating leases (including properties and computer and office equipment) was approximately $123.6 million, $117.3 million, and $99.3 million for the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012, respectively. Minimum annual rental commitments under current noncancellable operating leases, as of January 3, 2015, substantially all of which relate to property, were as follows: Fiscal Year 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter $ Operating Leases 125,650 121,100 115,889 108,653 90,057 351,356 Total . . . . . . . . . . . . . . . . . . . . . . . $ 912,705 Amounts related to property include leases on retail stores as well as various corporate offices, distribution facilities, and other premises. The majority of the Company’s lease terms range between 5 to 10 years. NOTE 18—COMMITMENTS AND CONTINGENCIES The Company is subject to various claims and pending or threatened lawsuits in the normal course of business. The Company is not currently a party to any legal proceedings that it believes would have a material adverse effect on its financial position, results of operations, or cash flows. The Company’s contractual obligations and commitments also include obligations associated with leases, the secured revolving credit agreement, senior notes, employee benefit plans, and facility consolidations/closures as disclosed elsewhere in the notes to the consolidated financial statements. NOTE 19—VALUATION AND QUALIFYING ACCOUNTS Information regarding accounts receivable is as follows: (dollars in thousands) Balance, December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charges to reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charges to reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charges to reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable reserves $ 4,620 8,251 (5,683) $ 7,188 10,245 (8,125) $ 9,308 9,919 (7,419) Sales returns reserves $ $ $ 400 954 (954) 400 1,110 (1,110) 400 715 (715) Total $ 5,020 9,205 (6,637) $ 7,588 11,355 (9,235) $ 9,708 10,634 (8,134) Balance, January 3, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,808 $ 400 $12,208 94 46496_10k.pdf Page 98 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20—UNAUDITED QUARTERLY FINANCIAL DATA The unaudited summarized financial data by quarter for the fiscal years ended January 3, 2015 and December 28, 2013 is presented in the table below: (dollars in thousands, except per share data) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Fiscal 2014: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general, and administrative expenses . . . . . . . . . . . . . . . . . Royalty income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $651,643 261,725 210,095 (9,901) 61,531 34,297 $574,065 245,477 206,315 (8,185) 47,347 25,897 $798,936 321,206 221,939 (11,190) 110,457 65,886 $869,224 356,032 251,902 (9,880) 114,010 68,590 Basic net income per common share . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income per common share . . . . . . . . . . . . . . . . . . . . . . 0.64 0.63 0.48 0.48 1.24 1.23 1.30 1.29 Fiscal 2013: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general, and administrative expenses . . . . . . . . . . . . . . . . . Royalty income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $591,009 243,062 185,361 (9,242) 66,943 41,415 $517,874 220,245 195,014 (7,507) 32,738 19,673 $760,173 309,649 229,264 (10,691) 91,076 56,571 $769,655 322,423 258,841 (9,812) 73,394 42,748 Basic net income per common share . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income per common share . . . . . . . . . . . . . . . . . . . . . . 0.70 0.69 0.33 0.33 0.98 0.97 0.78 0.78 F o r m 1 0 - K 95 46496_10k.pdf Page 99 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21—GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The Company’s senior notes constitute debt obligations of its subsidiary, The William Carter Company (“TWCC” or the “Subsidiary Issuer”), are unsecured and are fully and unconditionally guaranteed by Carter’s, Inc. (the “Parent”), by each of the Company’s current domestic subsidiaries, and, subject to certain exceptions, future restricted subsidiaries that guarantee the Company’s senior secured revolving credit facility or certain other debt of the Company or the subsidiary guarantors. The condensed consolidating financial information for the Parent, the Subsidiary Issuer, and the guarantor and non-guarantor subsidiaries has been prepared from the books and records maintained by the Company. The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10. The financial information may not necessarily be indicative of the financial position, results of operations, comprehensive income (loss), and cash flows, had the Parent, Subsidiary Issuer, guarantor or non-guarantor subsidiaries operated as independent entities. Intercompany revenues and expenses included in the subsidiary records are eliminated in consolidation. As a result of this activity, an amount due to/due from affiliates will exist at any time. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The Company has accounted for investments in subsidiaries under the equity method. The guarantor subsidiaries are 100% owned directly or indirectly by the Parent and all guarantees are joint, several and unconditional. During fiscal 2014, the Company revised its Guarantor Condensed Consolidating Statements of Comprehensive Income to correct a presentation error related to certain other comprehensive income (loss) transactions within the Subsidiary Issuer and Guarantor Subsidiaries columns in the Company’s previously filed Form 10-Q for the first and second fiscal quarters of 2014, which includes the comparative periods, and for the fiscal years ended December 28, 2013 and December 29, 2012. These presentation items had no effect on the Company’s Consolidated Financial Statements. The Company concluded that these items were not material to the financial statements taken as a whole, but elected to revise previously reported amounts within this footnote for all periods presented. Future filings will reflect these revisions. 96 46496_10k.pdf Page 100 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21—GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidating Balance Sheet As of January 3, 2015 (dollars in thousands) ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . $ Accounts receivable, net . . . . . . . . . . . Intercompany receivable . . . . . . . . . . . Intercompany loan receivable . . . . . . . Finished goods inventories, net . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . Total current assets . . . . . . . . . . . Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill Tradenames and other intangibles, net . . Deferred debt issuance costs, net . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . Intercompany long-term receivable . . . . . Intercompany long-term note Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated — $ 311,078 $ 10,442 $ 19,118 $ — 155,192 58,402 — — 20,000 — 240,702 22,770 106,137 — 191,953 6,601 2,012 — 48,463 — $ 340,638 — 184,563 — — 444,844 (166,551) (20,000) (36,274) — — 15,143 21,308 13,059 12,983 6,586 2,334 — — 34,788 36,625 F o r m 1 0 - K — 821,825 — 158,017 — 136,570 — 231,765 6,677 — — 11,781 — 357,344 147,076 (222,825) 1,041,458 85,114 — 333,097 28,004 — 181,975 — 45,405 — 317,297 32 — 6,677 — 12,592 — — — — (274,584) 85,500 — 811 — 274,584 receivable . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . — 100,000 591,735 786,684 — 9,647 — (100,000) — (1,388,066) — — Total assets . . . . . . . . . . . . . . . $786,684 $2,058,370 $874,962 $158,555 $(1,985,475) $1,893,096 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . $ Intercompany payables . . . . . . . . . . . . Intercompany loan payables . . . . . . . . Other current liabilities . . . . . . . . . . . . Total current liabilities . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . Intercompany long-term liability . . . . . . . Intercompany long-term note payable . . . Other long-term liabilities . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . Total liabilities and stockholders’ — $ 102,233 $ 37,869 $ 10,141 $ — 105,940 — — 15,782 — 4,799 — 20,000 14,153 55,812 67,793 — $ 150,243 — — 97,728 (166,551) (20,000) — — 223,955 — 586,000 — 81,406 — 274,584 — — 786,684 161,474 — 40,130 — — 100,000 68,426 504,932 69,467 822,958 (186,551) 49,093 — — — (274,584) — (100,000) 13,012 96,450 (1,424,340) 247,971 — 586,000 — 121,536 — — — 150,905 786,684 equity . . . . . . . . . . . . . . . . . . . . $786,684 $2,058,370 $874,962 $158,555 $(1,985,475) $1,893,096 97 46496_10k.pdf Page 101 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21—GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidating Balance Sheet As of December 28, 2013 (dollars in thousands) ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . $ Accounts receivable, net . . . . . . . . . . . Intercompany receivable . . . . . . . . . . . Finished goods inventories, net . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . Total current assets . . . . . . . . . . . Property, plant, and equipment, net . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . Tradenames and other intangibles, net Deferred debt issuance costs, net . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . Intercompany long-term receivable . . . . . Intercompany long-term note Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated — $ 278,260 $ — 163,264 62,802 — — 221,462 — $ 20,365 104,123 181,889 8,286 $ 9,982 12,385 46,217 — $ 286,546 — 193,611 — 417,754 (179,310) (31,814) — — 18,475 20,594 11,878 15,893 4,804 826 — — 35,157 37,313 — 764,857 — 148,671 — 136,570 — 244,653 8,088 — — 9,743 — 334,148 133,846 (211,124) 970,381 82,500 — 307,885 25,368 — 186,077 — 49,507 — 330,258 105 8,088 — — 9,795 — — — — (263,183) 85,500 — 52 — 263,183 receivable . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . — 100,000 547,186 700,731 — 1,502 — (100,000) — (1,249,419) — — Total assets . . . . . . . . . . . . . . . $700,731 $1,959,768 $818,231 $157,480 $(1,823,726) $1,812,484 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . $ Intercompany payables . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt Deferred income taxes . . . . . . . . . . . . . . . Intercompany long-term liability . . . . . . . Intercompany long-term note payable . . . Other long-term liabilities . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . Total liabilities and stockholders’ — $ 108,851 $ 40,825 $ 14,334 $ — 100,804 29,037 — 7,649 18,482 70,857 57,610 (179,310) — $ 164,010 — — 105,129 — 238,692 — 586,000 — 77,798 — 263,183 — — 700,731 169,292 — 43,636 — — 100,000 55,175 450,128 61,550 732,545 (179,310) 40,465 — — — (263,183) — (100,000) 18,455 98,560 (1,281,233) 269,139 — 586,000 — 121,434 — — — 135,180 700,731 equity . . . . . . . . . . . . . . . . . . . . $700,731 $1,959,768 $818,231 $157,480 $(1,823,726) $1,812,484 98 46496_10k.pdf Page 102 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21—GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidating Statement of Operations For the year end January 3, 2015 (dollars in thousands) Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated Net sales . . . . . . . . . . . . . . . . . . . . . $ Cost of goods sold . . . . . . . . . . . . . — $1,770,238 $1,564,717 936,260 — 1,271,260 $241,191 138,838 $(682,278) $2,893,868 1,709,428 (636,930) Gross profit Selling, general, and . . . . . . . . . . . . . . . . . . administrative expenses . . . . . . Royalty income . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . (Income) loss in subsidiaries . . . . . . Other (income) expense, net . . . . . . Income before income taxes . . . . . Provision for income taxes . . . . . . . — — — — — — (194,670) — 194,670 — 498,978 628,457 102,353 (45,348) 1,184,440 203,371 (30,741) 326,348 27,651 (5,998) 20,226 (235) 284,704 85,574 646,728 (18,896) 625 5,310 — (15,050) 2,263 8,102 19,441 91,521 — 10,832 343 (56) — 1,161 9,384 3,221 (51,369) 10,481 (4,460) (5,651) 5,651 189,494 — (193,954) — 890,251 (39,156) 333,345 27,653 (403) — 3,189 302,906 108,236 Net income (loss) . . . . . . . . . . . . . . $ 194,670 $ 199,130 $ (11,339) $ 6,163 $(193,954) $ 194,670 F o r m 1 0 - K 99 46496_10k.pdf Page 103 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21—GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidating Statement of Operations For the year end December 28, 2013 (dollars in thousands) Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated Net sales . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . $ — $1,637,361 — 1,170,073 $1,397,540 819,798 $220,438 112,503 $(616,628) $2,638,711 1,543,332 (559,042) Gross profit . . . . . . . . . . . . . . . . Selling, general, and administrative expenses . . . . Royalty income . . . . . . . . . . . . . Operating income (loss) . . . . . . Interest expense . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . (Income) loss in subsidiaries . . . Other (income) expense, net . . . . Income (loss) before income — — — — — — (160,407) — 467,288 577,742 107,935 (57,586) 1,095,379 204,255 (28,174) 291,207 13,374 (1,100) 51,973 (358) 632,854 (17,909) 102,115 — (37,203) 598 — 10,122 403 5,820 63 (167) — 1,873 (70,744) 8,831 4,327 (598) 598 98,312 — 868,480 (37,252) 264,151 13,437 (669) — 1,918 taxes . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . 160,407 — 227,318 71,238 (48,326) 11,061 4,051 6,759 (93,985) — 249,465 89,058 Net income (loss) . . . . . . . . . . . $ 160,407 $ 156,080 $ (59,387) $ (2,708) $ (93,985) $ 160,407 100 46496_10k.pdf Page 104 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21—GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidating Statement of Operations For the year end December 29, 2012 (dollars in thousands) Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated Net sales . . . . . . . . . . . . . . . . . . . . . $ Cost of goods sold . . . . . . . . . . . . . — $1,482,066 $1,241,686 747,906 — 1,066,249 $150,494 79,148 $(492,512) $2,381,734 1,443,786 (449,517) Gross profit . . . . . . . . . . . . . . . . . . Selling, general, and administrative expenses . . . . . . . . . . . . . . . . . . . Royalty income . . . . . . . . . . . . . . . — — — Operating income (loss) . . . . . . . . . Interest expense . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . (Income) loss in subsidiaries . . . . . . . . . . Other expense (income), net — — — (161,150) — Income (loss) before income 415,817 493,780 71,346 (42,995) 937,948 163,614 (25,460) 277,663 6,749 (230) 32,053 64 535,927 (18,118) (24,029) — — 4,761 145 61,000 — 10,346 121 (109) — (145) (47,330) 6,329 (1,994) (105) 105 124,336 — 713,211 (37,249) 261,986 6,765 (234) — 64 F o r m 1 0 - K taxes . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . 161,150 — 239,027 75,885 (28,935) 12,788 10,479 5,568 (126,330) — 255,391 94,241 Net income (loss) . . . . . . . . . . . . . . $ 161,150 $ 163,142 $ (41,723) $ 4,911 $(126,330) $ 161,150 101 46496_10k.pdf Page 105 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21—GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidating Statements of Comprehensive Income (Loss) For the year end January 3, 2015 (dollars in thousands) Net income (loss) . . . . . . . . . . . . . . Post-retirement benefit plans . . . . . Foreign currency translation Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated $194,670 (5,110) $199,130 (5,110) $(11,339) (4,963) $ 6,163 — $(193,954) 10,073 $194,670 (5,110) adjustments . . . . . . . . . . . . . . . . . (7,845) (7,845) (251) (7,845) 15,941 (7,845) Comprehensive income (loss) . . . . . $181,715 $186,175 $(16,553) $(1,682) $(167,940) $181,715 For the year end December 28, 2013 (dollars in thousands) Net income (loss) . . . . . . . . . . . . . . Post-retirement benefit plans . . . . . Foreign currency translation Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated $160,407 6,609 $156,080 6,609 $(59,387) 6,237 $(2,708) — $(93,985) (12,846) $160,407 6,609 adjustments . . . . . . . . . . . . . . . . . (5,486) (5,486) 354 (5,486) 10,618 (5,486) Comprehensive income (loss) . . . . . $161,530 $157,203 $(52,796) $(8,194) $(96,213) $161,530 For the year end December 29, 2012 (dollars in thousands) Net income (loss) . . . . . . . . . . . . . . Post-retirement benefit plans . . . . . Foreign currency translation Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated $161,150 (981) $163,142 (981) $(41,723) (1,163) $4,911 — $(126,330) 2,144 $161,150 (981) adjustments . . . . . . . . . . . . . . . . . 1,058 1,058 (114) 1,058 (2,002) 1,058 Comprehensive income (loss) . . . . . $161,227 $163,219 $(43,000) $5,969 $(126,188) $161,227 102 46496_10k.pdf Page 106 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21—GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidating Statement of Cash Flows For the year end January 3, 2015 (dollars in thousands) Cash flows provided by operating activities: . . . . . . . . . . . . . . . . . . . . . . $ — $ 189,945 $ 83,439 $ 9,013 $ — $ 282,397 Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated Cash flows from investing activities: Capital expenditures . . . . . . . . . . . . . Intercompany investing activity . . . . . Proceeds from repayment of intercompany loan . . . . . . . . . . . . . Issuance of intercompany loan . . . . . Acquisition of tradenames . . . . . . . . . Proceeds from sale of property, plant . . . . . . . . . . . . . . . . and equipment Net cash provided by (used in) — (45,868) 15,864 118,060 (46,694) (2,445) (10,891) (8,901) — (103,453) — (122,578) — 15,000 — (35,000) (3,550) — — 2,267 — — — — — — — 4 (15,000) 35,000 — — — (3,550) — 2,271 F o r m 1 0 - K investing activities . . . . . . . . . . . $ 118,060 $ (51,287) $(49,139) $(19,788) $(102,578) $(104,732) Cash flows from financing activities: Intercompany financing activity . . . . Repayments of intercompany loan . . Proceeds from intercompany loans . . Payment of debt issuance costs . . . . . Payment of contingent consideration . . . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . Repurchase of common stock . . . . . . Income tax benefit from stock-based — (99,018) — — — — (177) — (26,302) 2,742 — (15,000) 35,000 — — — 122,578 15,000 (35,000) — — (40,477) (82,099) (8,901) — — — — — — — — (177) (8,901) (40,477) (82,099) 4,700 (4,548) 9,064 — — — — — — — — — — — — compensation . . . . . . . . . . . . . . . . . — 2,256 2,444 Withholdings from vesting of restricted stock . . . . . . . . . . . . . . . . (4,548) Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . 9,064 — — — — Net cash (used in) provided by financing activities . . . . . . . . . . . (118,060) (105,840) (23,858) 22,742 102,578 (122,438) Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (1,135) — 32,818 10,442 10,832 — 278,260 — 8,286 — 286,546 — — (1,135) 54,092 Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 311,078 $ 10,442 $ 19,118 $ — $ 340,638 103 46496_10k.pdf Page 107 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21—GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidating Statement of Cash Flows For the year end December 28, 2013 (dollars in thousands) Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated Cash flows provided by operating activities: . . . . . . . . . . . . . . . . . . . . . $ — $ 125,482 $ 72,095 $ 12,119 $ — $ 209,696 Cash flows from investing activities: Capital expenditures . . . . . . . . . . . . Intercompany investing activity . . . Issuance of intercompany loan . . . . Acquisition of tradenames . . . . . . . . Net cash provided by (used in) 473,988 — (111,560) 26,693 — (100,000) — (38,007) (59,852) (4,112) — — (11,113) (14,721) — — — (182,525) — — (38,007) (481,848) 100,000 — investing activities . . . . . . . . . . $ 473,988 $(222,874) $ (63,964) $(25,834) $(381,848) $(220,532) — 400,000 — (361,424) — (119,183) — (1,241) — 481,848 400,000 — — — — 100,000 — (6,989) — (100,000) — — — (6,989) Cash flows from financing activities: Proceeds from senior notes . . . . . . . Intercompany financing activity . . . Proceeds from intercompany loan . . . . . . . . . . . . . . . . . . . . . . . Payment of debt issuance costs . . . . Payment of contingent consideration . . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . Repurchase of common stock . . . . . Income tax benefit from stock- — (14,721) — — (27,715) (454,133) — — — based compensation . . . . . . . . . . . — 6,928 4,112 Withholdings from vesting of restricted stock . . . . . . . . . . . . . . . (5,052) Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . 12,912 — — — — Net cash (used in) provided by — — — — — — (14,721) — — (27,715) — (454,133) — — — 11,040 (5,052) 12,912 financing activities . . . . . . . . . (473,988) 23,794 (15,071) (1,241) 381,848 (84,658) Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . — — — (196) Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . — (73,598) (6,940) (15,152) Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . — 351,858 6,940 23,438 — — — (196) (95,690) 382,236 Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 278,260 $ — $ 8,286 $ — $ 286,546 104 46496_10k.pdf Page 108 CARTER’S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21—GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidating Statement of Cash Flows For the year end December 29, 2012 (dollars in thousands) Parent Subsidiary Issuer Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Consolidated Cash flows provided by operating activities: . . . . . . . . . . . . . . . . . . . . $ — $153,058 $107,433 $18,128 $ — $278,619 Cash flows from investing activities: Capital expenditures . . . . . . . . . . . Intercompany investing activity . . Proceeds from repayment of intercompany loan . . . . . . . . . . . Proceeds from sale of property, plant and equipment . . . . . . . . . . Net cash used in investing — (24,072) 4,548 (2,839) (50,337) (4,528) (8,989) 2,819 — — (83,398) — — — 4,766 — — — — 6 (4,766) — — 6 F o r m 1 0 - K activities . . . . . . . . . . . . . . . . . (2,839) (14,758) (54,865) (6,164) (4,766) (83,392) Cash flows from financing activities: Intercompany financing activity . . Repayment of intercompany loan . . . . . . . . . . . . . . . . . . . . . . Borrowings under secured revolving credit facility . . . . . . . Payments on secured revolving credit facility . . . . . . . . . . . . . . . Payment of debt issuance costs . . . Income tax benefit from stock- 44,557 (47,620) 3,063 — — — — — — — (50,000) (1,916) — — — — — (4,766) 4,766 2,500 (2,500) — — — — — — — — — — — — 2,500 (52,500) (1,916) 2,760 (2,846) 5,685 based compensation . . . . . . . . . . — 1,051 1,709 Withholdings from vesting of restricted stock . . . . . . . . . . . . . . (2,846) Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . 5,685 Net cash provided by (used in) — — — — financing activities . . . . . . . . . 2,839 (6,308) (45,911) (1,703) 4,766 (46,317) Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . Net increase in cash and cash — — — (168) equivalents . . . . . . . . . . . . . . . . . — 131,992 6,657 10,093 Cash and cash equivalents, beginning of period . . . . . . . . . . — 219,866 283 13,345 Cash and cash equivalents, end of — — — (168) 148,742 233,494 period . . . . . . . . . . . . . . . . . . . . . $ — $351,858 $ 6,940 $23,438 $ — $382,236 105 46496_10k.pdf Page 109 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of January 3, 2015. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, 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. Internal control over financial reporting includes those policies and procedures that: • • • pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; 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 expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and 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. Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of January 3, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control-Integrated Framework. Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of January 3, 2015. The effectiveness of Carter’s, Inc. and its subsidiaries’ internal control over financial reporting as of January 3, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal controls over financial reporting during the fourth quarter of fiscal 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 106 46496_10k.pdf Page 110 ITEM 9B. OTHER INFORMATION Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by Item 10 is incorporated herein by reference to the definitive proxy statement relating to the Annual Meeting of Stockholders of Carter’s, Inc. to be held in May, 2015. Carter’s, Inc. intends to file such definitive proxy statement with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is incorporated herein by reference to the definitive proxy statement referenced above in Item 10. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS EQUITY COMPENSATION PLAN INFORMATION The following table provides information about our equity compensation plan as of our last fiscal year end: F o r m 1 0 - K Plan Category Equity compensation plans approved by security Number of securities to be issued upon exercise of outstanding options, warrants, and rights Weighted-average exercise price of outstanding options, warrants, and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) holders (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,486,390 $39.99 2,395,041 Equity compensation plans not approved by security holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,486,390 — $39.99 — 2,395,041 (1) Represents stock options that are outstanding or that are available for future issuance pursuant to the Carter’s, Inc. Amended and Restated Equity Incentive Plan. Additional information called for by Item 12 is incorporated herein by reference to the definitive proxy statement referenced above in Item 10. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Item 13 is incorporated herein by reference to the definitive proxy statement referenced above in Item 10. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information called for by Item 14 is incorporated herein by reference to the definitive proxy statement referenced above in Item 10. 107 46496_10k.pdf Page 111 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) 1. Financial Statements filed as part of this report Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidating Balance Sheets at January 3, 2015 and December 28, 2013 . . . . . . . . . . . . . . . . Consolidated Statements of Operations for the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 52 53 54 Consolidated Statements of Comprehensive Income for the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Consolidated Statements of Cash Flows for the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended January 3, 2015, December 28, 2013, and December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 58 2. Financial Statement Schedules: None (B) Exhibits: Exhibit Number Description of Exhibits 3.1 3.2 4.1 4.2 4.3 4.4 Certificate of Incorporation of Carter’s, Inc., as amended on May 12, 2006. Incorporated by reference to Carter’s, Inc.’s Annual Report on Form 10-K filed on February 28, 2007. Amended and Restated By-laws of Carter’s, Inc. Incorporated by reference to Carter’s, Inc. Annual Report on Form 10-K filed on February 29, 2012. Specimen Certificate of Common Stock. Incorporated by reference to Carter’s, Inc.’s Registration Statement on Form S-1 (No. 333-98679) filed on October 10, 2003. Indenture, dated August 12, 2013, by and among The William Carter Company certain guarantors party thereto from time to time and Wells Fargo Bank, National Association, as trustee. Incorporated by reference to Carter’s, Inc. Current Report on Form 8-K filed on August 12, 2013. First Supplemental Indenture, dated June 25, 2014, by and among The William Carter Company, certain guarantors party thereto from time to time and Wells Fargo Bank, National Association, as Trustee. Incorporated by reference to Carter’s, Inc. Amendment No. 1 to Registration Statement on Form S-4 filed on June 27, 2014. Registration Rights Agreement, dated August 12, 2013, by and among The William Carter Company, the guarantors party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated. Incorporated by reference to Carter’s, Inc. Periodic Report on Form 8-K filed on August 12, 2013. 108 46496_10k.pdf Page 112 Exhibit Number Description of Exhibits 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 Second Amended and Restated Credit Agreement dated as of August 31, 2012, among The William Carter Company, as U.S. borrower, The Genuine Canadian Corp., as Canadian borrower, Bank of America, N.A., as Administrative Agent, U.S. Dollar Facility Swing Line Lender, U.S. Dollar Facility L/C Issuer and Collateral Agent, Bank of America, N.A., Canada Branch, as Canadian Agent, Multicurrency Facility Swing Line Lender and as a Multicurrency Facility L/C Issuer, JPMorgan Chase Bank, N.A., as Syndication Agent, Royal Bank of Canada, SunTrust Bank and U.S. Bank National Association, as Co-Documentation Agents and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Bookrunning Manager, and certain other lenders party thereto. Incorporated by reference to Carter’s, Inc. Current Report on Form 8-K filed on September 4, 2012. Amended and Restated Severance Agreement between The William Carter Company and Michael D. Casey, dated as of March 2, 2011. Incorporated by reference to Carter’s, Inc.’s Annual Report on Form 10-K filed on March 2, 2011. Severance Agreement between The William Carter Company and Lisa A. Fitzgerald, dated as of March 2, 2011. Incorporated by reference to Carter’s, Inc.’s Annual Report on Form 10-K filed on March 2, 2011. Amended and Restated Severance Agreement between The William Carter Company and Brian J. Lynch, dated as of March 2, 2011. Incorporated by reference to Carter’s, Inc.’s Annual Report on Form 10-K filed on March 2, 2011. Amended and Restated Severance Agreement between The William Carter Company and Richard F. Westenberger, dated as of March 2, 2011. Incorporated by reference to Carter’s, Inc.’s Annual Report on Form 10-K filed on March 2, 2011. Amended and Restated Equity Incentive Plan. Incorporated by reference to Carter’s, Inc.’s Schedule 14A filed on April 5, 2011. Amended and Restated Stockholders Agreement dated as of August 15, 2001 among Carter’s, Inc. and the stockholders of Carter’s, Inc., as amended. Incorporated by reference to Carter’s, Inc.’s Registration Statement on Form S-1 (No. 333-98679) filed on October 10, 2003. Amended and Restated Annual Incentive Compensation Plan. Incorporated by reference to Carter’s, Inc.’s Schedule 14A filed on April 5, 2011. The William Carter Company Severance plan, dated as of March 1, 2009. Incorporated by reference to Carter’s, Inc.’s Annual Report on Form 10-K filed on March 2, 2011. The William Carter Company Deferred Compensation Plan, dated as of November 10, 2010. Incorporated by reference to Carter’s, Inc.’s Annual Report on Form 10-K filed on March 2, 2011. Lease Agreement dated March 29, 2012 between The William Carter Company and Duke Secured Financing 2009-1 ALZ, LLC. Incorporated by reference to Carter’s, Inc. Quarterly Report on Form 10-Q filed on April 27, 2012. Lease Agreement dated December 14, 2012 between The William Carter Company and Phipps Tower Associates, LLC. & Lease Termination Agreement dated December 14, 2012 between The William Carter Company and John Hancock Life Insurance Company (U.S.A). Incorporated by reference to Carter’s, Inc. Current Report on Form 8-K filed on December 14, 2012. Amendment No. 1 to the Amended and Restated Severance Agreement between The William Carter Company and Brian Lynch, dated as of May 15, 2013. Incorporated by reference to Carter’s, Inc. Quarterly Report on Form 10-Q filed on April 25, 2013. 109 F o r m 1 0 - K 46496_10k.pdf Page 113 Exhibit Number Description of Exhibits 10.14 10.15 10.16 10.17 10.18 10.19 21 23 31.1 31.2 32 Phipps Tower Lease—Second Amendment dated June 17, 2013 Incorporated by reference to Carter’s, Inc. Quarterly Report on Form 10-Q filed on July 26, 2013. Master Confirmation—Uncollared Accelerated Share Repurchase dated August 29, 2013. Incorporated by reference to Carter’s, Inc. Quarterly Report on Form 10-Q filed on October 24, 2013. Master Confirmation—Collared Accelerated Share Repurchase dated August 29, 2013. Incorporated by reference to Carter’s, Inc. Quarterly Report on Form 10-Q filed on October 24, 2013. Amendment to Secured Revolving Credit Facility dated August 7, 2013. Incorporated by reference to Carter’s, Inc. Quarterly Report on Form 10-Q filed on October 24, 2013. Separation Agreement between The William Carter Company and Lisa A. Fitzgerald, dated as of January 19, 2014. Incorporated by reference to Carters, Inc.’s Quarterly Report on Form 10-Q filed on April 28, 2014. Amended and Restated Severance Agreement between The William Carter Company and Michael D. Casey, dated as of March 5, 2014. Incorporated by reference to Carters, Inc.’s Quarterly Report on Form 10-Q filed on April 28, 2014. Subsidiaries of Carter’s, Inc. Consent of Independent Registered Public Accounting Firm. Rule 13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f) Certification. Rule 13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f) Certification. Section 1350 Certification. 110 46496_10k.pdf Page 114 SIGNATURES Pursuant to the requirements of Section 13 or 15(a) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. CARTER’S, INC. /s/ MICHAEL D. CASEY Michael D. Casey Chief Executive Officer Date: February 26, 2015 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date /s/ MICHAEL D. CASEY Michael D. Casey Chairman and Chief Executive Officer (Principal Executive Officer) February 26, 2015 F o r m 1 0 - K /s/ RICHARD F. WESTENBERGER Executive Vice President and Chief Financial Officer February 26, 2015 Richard F. Westenberger (Principal Financial and Accounting Officer) /s/ AMY WOODS BRINKLEY Amy Woods Brinkley /s/ VANESSA J. CASTAGNA Vanessa J. Castagna /s/ A. BRUCE CLEVERLY A. Bruce Cleverly /s/ JEVIN S. EAGLE Jevin S. Eagle Director February 26, 2015 Director February 26, 2015 Director February 26, 2015 Director February 26, 2015 111 46496_10k.pdf Page 115 Name Title Date /s/ PAUL FULTON Paul Fulton Director February 26, 2015 /s/ WILLIAM J. MONTGORIS William J. Montgoris Director February 26, 2015 /s/ DAVID PULVER David Pulver /s/ JOHN R. WELCH John R. Welch Director February 26, 2015 Director February 26, 2015 /s/ THOMAS E. WHIDDON Thomas E. Whiddon Director February 26, 2015 112 46496_10k.pdf Page 116 Exhibit 31.1 CERTIFICATION I, Michael D. Casey, certify that: 1. I have reviewed this annual report on Form 10-K of Carter’s, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 26, 2015 /s/ MICHAEL D. CASEY Michael D. Casey Chief Executive Officer 113 F o r m 1 0 - K 46496_10k.pdf Page 117 CERTIFICATION I, Richard F. Westenberger, certify that: 1. I have reviewed this annual report on Form 10-K of Carter’s, Inc.; Exhibit 31.2 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 26, 2015 /s/ RICHARD F. WESTENBERGER Richard F. Westenberger Chief Financial Officer 114 46496_10k.pdf Page 118 CERTIFICATION Exhibit 32 Each of the undersigned in the capacity indicated hereby certifies that, to his knowledge, this Annual Report on Form 10-K for the fiscal year ended January 3, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of Carter’s, Inc. February 26, 2015 February 26, 2015 /s/ MICHAEL D. CASEY Michael D. Casey Chief Executive Officer /s/ RICHARD F. WESTENBERGER Richard F. Westenberger Chief Financial Officer The foregoing certifications are being furnished solely pursuant to 18 U.S.C. § 1350 and are not being filed as part of the Annual Report on Form 10-K or as a separate disclosure document. F o r m 1 0 - K 115 46496_10k.pdf Page 119 RECONCILIATION OF NON-GAAP FINANCIAL MEASUREMENTS In addition to presenting results prepared in accordance with generally accepted accounting principles (or “GAAP”), the Company has provided adjusted, non-GAAP financial measurements that present gross margin, SG&A, operating income, net income, and net income per diluted share excluding the following items: (dollars in millions, except earnings per share) As reported (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of H.W. Carter and Sons tradenames . . . . . . . . . . Office consolidation costs (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . Revaluation of contingent consideration (b) . . . . . . . . . . . . . . . . Closure of distribution facility in Hogansville, GA . . . . . . . . . . Costs to exit retail operations in Japan . . . . . . . . . . . . . . . . . . . . Fiscal year ended January 3, 2015 Gross Margin $1,184.4 — — — (1.0) SG&A $890.3 (16.4) (6.6) (1.3) (0.9) (1.5) Operating Income Net Income Diluted EPS $333.3 16.4 6.6 1.3 0.9 0.5 $194.7 10.4 4.2 1.3 0.6 0.3 $3.62 0.19 0.08 0.03 0.01 0.01 As adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,183.4 $863.3 $359.3 $211.5 $3.93 (dollars in millions, except earnings per share) As reported (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office consolidation costs (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of H.W. Carter and Sons tradenames . . . . . . . . . . Costs to exit retail operations in Japan . . . . . . . . . . . . . . . . . . . . Closure of distribution facility in Hogansville, GA . . . . . . . . . . Revaluation of contingent consideration (b) . . . . . . . . . . . . . . . . Fiscal year ended December 28, 2013 Gross Margin $1,095.4 — — 1.1 — — SG&A $868.5 (33.3) (13.6) (3.0) (1.9) (2.8) Operating Income Net Income Diluted EPS $264.2 33.3 13.6 4.1 1.9 2.8 $160.4 21.0 8.6 2.6 1.2 2.8 $2.75 0.36 0.15 0.04 0.02 0.05 As adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,096.4 $813.9 $319.8 $196.5 $3.37 (dollars in millions, except earnings per share) As reported (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office consolidation costs (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . Revaluation of contingent consideration (b) . . . . . . . . . . . . . . . . Closure of distribution facility in Hogansville, GA . . . . . . . . . . Fiscal year ended December 29, 2012 Gross Margin $ 937.9 — — — SG&A $713.2 (6.4) (3.6) (3.1) Operating Income Net Income Diluted EPS $262.0 6.4 3.6 3.1 $161.2 4.0 3.6 1.9 $2.69 0.07 0.06 0.03 As adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 937.9 $700.1 $275.1 $170.7 $2.85 (a) Costs associated with office consolidation including severance, relocation, accelerated depreciation and other charges. (b) Revaluation of the contingent consideration liability associated with the Company’s 2011 acquisition of Bonnie Togs. The adjusted non-GAAP financial information is not necessarily indicative of the Company’s future condition or results of operations. These adjustments, which the Company does not believe to be indicative of on-going business trends, are excluded from the above calculations to allow a more comparable evaluation and analysis of historical trends. The adjusted, non-GAAP financial measurements included in this Annual Report should not be considered as alternative to gross margin, SG&A, operating income, net income, or earnings per share, or to any other measurement of performance derived from GAAP. Note: Amounts may not be additive due to rounding. 116 46496_10k.pdf Page 120 Notice of 2015 Annual Meeting of Shareholders and Proxy Statement P r o x y 46496_10k.pdf Page 121 46496_10k.pdf Page 122 March 31, 2015 Dear Shareholder, It is my pleasure to invite you to attend our 2015 Annual Meeting of Shareholders on May 7, 2015 (the “Annual Meeting”). The meeting will be held at 8:00 a.m. at our offices located at 3438 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326. The attached Notice of the 2015 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 by telephone, over the internet, or by completing, signing, dating, and returning your proxy card in the enclosed envelope. On behalf of our Board of Directors and the Leadership Team, thank you for your investment in Carter’s, Inc. Sincerely, Michael D. Casey Chairman and Chief Executive Officer P r o x y 46496_10k.pdf Page 123 46496_10k.pdf Page 124 3438 Peachtree Road NE, Suite 1800 Atlanta, Georgia 30326 Tel: (678) 791-1000 Fax: (404) 846-1647 NOTICE OF 2015 ANNUAL MEETING OF SHAREHOLDERS Notice is hereby given that the 2015 Annual Meeting of Shareholders of Carter’s, Inc. (the “Annual Meeting”) will be held at 8:00 a.m. on May 7, 2015 at our offices located at 3438 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326. The business matters for the Annual Meeting are as follows: 1) The election of two Class III directors; 2) An advisory approval of executive compensation; 3) The ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for fiscal 2015; and 4) Any other business that may properly come before the meeting. Shareholders of record at the close of business on March 23, 2015 are entitled to receive notice of, attend, and vote at the Annual Meeting. Your vote is very important. Whether or not you plan to attend the Annual Meeting, to ensure that your shares are represented at the Annual Meeting, please complete, sign, date, and return the proxy card in the envelope provided or submit your voting instructions by telephone or over the internet. If you plan to attend the Annual Meeting and are a registered shareholder, please bring the invitation attached to your proxy card. If your shares are registered in the name of a bank or your broker, please bring your bank or brokerage statement showing your beneficial ownership with you to the Annual Meeting or request an invitation by writing to me at the address set forth above. Important notice regarding the availability of proxy materials for the 2015 Annual Meeting of Shareholders of Carter’s, Inc. to be held on May 7, 2015: The proxy materials and the Annual Report to Shareholders are available at http://www.carters.com/annuals P r o x y The Board of Directors recommends that you vote FOR each of the proposals identified above. By order of the Board of Directors, Michael C. Wu Senior Vice President, General Counsel, & Secretary Atlanta, Georgia March 31, 2015 46496_10k.pdf Page 125 PROXY STATEMENT TABLE OF CONTENTS Page General Information About the Proxy Materials and the Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . Board of Directors and Corporate Governance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proposal Number One – Election of Class III Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Officers’ Biographical Information and Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2014 Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2014 Grants of Plan-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding Equity Awards at Fiscal 2014 Year-End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option Exercises and Stock Vested in Fiscal 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonqualified Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities Ownership of Certain Beneficial Owners, Directors, and Executive Officers . . . . . . . . . . . . . . . Proposal Number Two – Advisory Vote on Approval of Executive Compensation . . . . . . . . . . . . . . . . . . . Transactions with Related Persons, Promoters, and Certain Control Persons . . . . . . . . . . . . . . . . . . . . . . . . Audit Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proposal Number Three – Ratification of Independent Registered Public Accounting Firm . . . . . . . . . . . . Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix A: 2014 Retail Survey Participant List 1 6 14 15 16 18 28 29 31 32 34 34 36 38 38 39 40 41 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 46496_10k.pdf Page 126 GENERAL INFORMATION ABOUT THE PROXY MATERIALS AND THE ANNUAL MEETING Why am I receiving this proxy statement? The Board of Directors of Carter’s, Inc. (“we,” “us,” “our,” “Carter’s,” or the “Company”) is soliciting proxies for our 2015 Annual Meeting of Shareholders on May 7, 2015 (the “Annual Meeting”). This proxy statement and accompanying proxy card are being mailed on or about April 6, 2015 to shareholders of record as of March 23, 2015, the record date. You are receiving this proxy statement because you owned shares of Carter’s common stock on the record date and are, therefore, entitled to vote at the Annual Meeting. By use of a proxy, you can vote regardless of whether or not you attend the Annual Meeting. This proxy statement provides information on the matters on which the Company’s Board of Directors (the “Board”) would like you to vote so that you can make an informed decision. What is the purpose of the Annual Meeting? The purpose of the Annual Meeting is to address the following business matters: 1. The election of two Class III directors (see page 14); 2. An advisory approval of compensation for our named executive officers (“NEOs”) (the “say-on-pay” vote) (see page 38); 3. The ratification of the appointment of PricewaterhouseCoopers LLP (“PwC”) as the Company’s independent registered public accounting firm for fiscal year 2015 (see page 40); and 4. All other business that may properly come before the meeting. Who is asking for my vote? The Company is soliciting your proxy on behalf of the Board. The Company is paying for the costs of this solicitation and proxy statement. Who can attend the Annual Meeting? All shareholders of record, or their duly appointed proxies, may attend the Annual Meeting. As of the record date, there were 52,649,741 shares of common stock issued and outstanding. What are my voting rights? Each share of common stock is entitled to one vote on each matter submitted to shareholders at the Annual Meeting. What is the difference between holding shares as a shareholder of record and as a beneficial owner? If your shares are registered directly in your name with the Company’s transfer agent, American Stock Transfer and Trust Company, you are considered the shareholder of record for these shares. As the shareholder of record, you have the right to grant your voting proxy directly to the persons listed on your proxy card or vote in person at the Annual Meeting. 1 P r o x y 46496_10k.pdf Page 127 If your shares are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held “in street name.” These proxy materials are being forwarded to you together with a voting instruction card. As a beneficial owner, you have the right to direct your broker, trustee, or nominee how to vote, and you are also invited to attend the Annual Meeting. Because you are a beneficial owner and not the shareholder of record, you may not vote your shares in person at the Annual Meeting unless you obtain a proxy from the broker, trustee, or nominee that holds your shares. Your broker, trustee, or nominee should have provided directions for you to instruct the broker, trustee, or nominee on how to vote your shares. What is a broker non-vote? If you are a beneficial owner whose shares are held of record by a broker and you do not provide voting instructions to your broker, your shares will not be voted on any proposal on which the broker does not have discretionary authority to vote. This is called a “broker non-vote.” Your broker only has discretionary authority to vote on Proposal Number Three. Therefore, your broker will not have discretion to vote on Proposal Number One and Proposal Number Two unless you specifically instruct your broker on how to vote your shares by returning your completed and signed voting instruction card. What are my choices when casting a vote with respect to the election of Class III directors, and what vote is needed to elect the director nominees? In voting on the election of Class III directors (Proposal Number One), shareholders may: 1. 2. 3. vote for any of the nominees, vote against any of the nominees, or abstain from voting on any of the nominees. Pursuant to our by-laws and our Corporate Governance Principles, the nominees who receive a majority of the votes properly cast at the Annual Meeting will be elected as Class III directors. This means that the number of votes cast “for” a director nominee must exceed the number of votes cast “against” that nominee and votes to “abstain” with respect to that nominee. Broker non-votes and votes to abstain on Proposal Number One will be counted toward the quorum, and abstentions will have the practical effect of a vote “against” a director nominee. What are my choices when casting an advisory vote on approval of compensation of the Company’s NEOs, commonly referred to as the “say-on-pay” vote, and what vote is needed to approve this Proposal? In voting on executive compensation (Proposal Number Two), shareholders may: 1. 2. 3. vote for the approval of compensation of the Company’s NEOs, on an advisory basis, as described in this proxy statement, vote against the approval of compensation of the Company’s NEOs, on an advisory basis, as described in this proxy statement, or abstain from voting on compensation of the Company’s NEOs, on an advisory basis, as described in this proxy statement. Because Proposal Number Two asks for a non-binding, advisory vote, there is no required vote that would constitute approval. We value the opinions expressed by our shareholders in this advisory vote, and our Compensation Committee will consider the outcome of the vote when designing our compensation programs and making future compensation decisions for our NEOs. Abstentions and broker non-votes, if any, will not have any impact on this advisory vote. 2 46496_10k.pdf Page 128 What are my choices when voting on the ratification of the appointment of PwC as the Company’s independent registered public accounting firm for fiscal 2015, and what vote is needed to approve this Proposal? In voting on the ratification of PwC (Proposal Number Three), shareholders may: 1. 2. 3. vote to ratify PwC’s appointment, vote against ratifying PwC’s appointment, or abstain from voting on ratifying PwC’s appointment. The approval of Proposal Number Three requires the affirmative vote of a majority of the votes properly cast at our Annual Meeting. Abstentions will not affect the outcome of this proposal. A broker or other nominee will generally have discretionary authority to vote on this proposal because it is considered a routine matter, and, therefore, we do not expect broker non-votes with respect to this proposal. What constitutes a quorum? A quorum is the minimum number of shares required to be present to transact business at the Annual Meeting. Pursuant to the Company’s by-laws, the presence at the Annual Meeting, in person, by proxy, or by remote communication, of the holders of at least a majority of the shares entitled to be voted will constitute a quorum. Broker non-votes and abstentions will be counted as shares that are present at the meeting for purposes of determining a quorum. If a quorum is not present, the meeting will be adjourned until a quorum is obtained. How does the Board recommend that I vote? The Board recommends a vote: FOR the election of the nominees for Class III directors (Proposal Number One); FOR the approval of the compensation of the Company’s NEOs as described in this proxy statement (Proposal Number Two); and FOR the ratification of the appointment of PwC (Proposal Number Three). How do I vote? If you are a shareholder of record, you may vote in one of four ways. First, you may vote over the internet by completing the voting instruction form found at www.proxyvote.com. You will need your proxy card when voting over the internet. Second, you may vote by touch-tone telephone by calling 1-800-690-6903. Third, you may vote by mail by signing, dating, and mailing your proxy card in the enclosed envelope. Fourth, you may vote in person at the Annual Meeting. If your shares are held in a brokerage account or by another nominee, these proxy materials are being forwarded to you together with a voting instruction card. Follow the instructions on the voting instruction card in order to vote your shares by proxy or in person. Can I change my vote after I return my proxy card? Yes. Even after you have submitted your proxy card, you may change or revoke your vote at any time before your proxy votes your shares by submitting written notice of revocation to Michael C. Wu, Senior Vice President of Legal and Corporate Affairs, General Counsel, and Secretary of Carter’s, Inc., at the Company’s 3 P r o x y 46496_10k.pdf Page 129 address set forth in the Notice of Annual Meeting, or by submitting another proxy card bearing a later date. Alternatively, if you have voted by telephone or over the internet, you may change your vote by calling 1-800- 690-6903 and following the instructions. The powers granted by you to the proxy holders will be suspended if you attend the Annual Meeting in person, although attendance at the Annual Meeting will not by itself revoke a previously granted proxy. If you hold your shares through a broker or other custodian and would like to change your voting instructions, please review the directions provided to you by that broker or custodian. May I vote confidentially? Yes. Our policy is to keep your individual votes confidential, except as appropriate to meet legal requirements, to allow for the tabulation and certification of votes, or to facilitate proxy solicitation. Who will count the votes? A representative of Broadridge Financial Solutions, Inc. will count the votes and act as the inspector of election for the Annual Meeting. What happens if additional matters are presented at the Annual Meeting? As of the date of this proxy statement, the Board knows of no matters other than those set forth herein that will be presented for determination at the Annual Meeting. If, however, any other matters properly come before the Annual Meeting and call for a vote of shareholders, the Board intends proxies to be voted in accordance with the judgment of the proxy holders. Where can I find the voting results of the Annual Meeting? We intend to announce preliminary voting results at the Annual Meeting and publish final results in our current report on Form 8-K within four business days after the Annual Meeting. What is “householding” of the Annual Meeting materials? The Securities and Exchange Commission (the “SEC”) has adopted rules that permit companies and intermediaries, such as brokers, to satisfy delivery requirements for proxy statements with respect to two or more shareholders sharing the same address by delivering a single proxy statement to those shareholders. This process, which is commonly referred to as “householding,” potentially provides extra convenience for shareholders and cost savings for companies. The Company and some brokers “household” proxy materials, delivering a single proxy statement and annual report to multiple shareholders sharing an address unless contrary instructions have been received from the affected shareholders. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate proxy statement and annual report, or if you are receiving multiple copies of the proxy statement and annual report and wish to receive only one, please notify your broker if your shares are held in a brokerage account, or the Company if you hold shares registered directly in your name. You can notify the Company by sending a written request to Mr. Wu at the Company’s address set forth in the 2015 Notice of Annual Meeting or by calling us at (678) 791-1000. How may I obtain a copy of the Company’s Annual Report? A copy of our fiscal 2014 Annual Report on Form 10-K (the “Annual Report”) accompanies this proxy statement and is available at http://www.carters.com/annuals. Shareholders may also obtain a free copy of our Annual Report by sending a request in writing to Mr. Wu at the Company’s address set forth in the Notice of the Annual Meeting. 4 46496_10k.pdf Page 130 When are shareholder proposals due for consideration in next year’s proxy statement or at next year’s Annual Meeting? Any proposals to be considered for inclusion in next year’s proxy statement must be submitted in writing to Mr. Wu at the Company’s address set forth in the Notice of Annual Meeting, and must be received prior to the close of business on December 9, 2015. There are additional requirements under our by-laws and the proxy rules to present a proposal, including continuing to own a minimum number of shares of our stock until next year’s Annual Meeting and appearing in person at the Annual Meeting to explain your proposal. Shareholders who wish to make a proposal to be considered at next year’s Annual Meeting, other than proposals to be considered for inclusion in next year’s proxy statement, must notify the Company in the same manner specified above no earlier than January 7, 2016, and no later than February 6, 2016. Who can help answer my questions? If you have any questions about the Annual Meeting or how to submit or revoke your proxy, or to request an invitation to the Annual Meeting, contact Mr. Wu at the Company’s address set forth in the Notice of Annual Meeting or by calling us at (678) 791-1000. P r o x y 5 46496_10k.pdf Page 131 BOARD OF DIRECTORS AND CORPORATE GOVERNANCE INFORMATION Board of Directors Our Board currently consists of ten directors and is divided into three classes, with the nominees for one class to be elected at each annual meeting of shareholders, to hold office for a three-year term and until successors of the members of such class have been elected and qualified, subject to their earlier death, resignation, or removal. In February 2015, we announced that John R. Welch will not be standing for re-election to the Board as a Class III director. Mr. Welch has served on the Board since 2003. Following the departure of Mr. Welch, the Board will consist of nine directors. We are conducting a search to add one or more new directors. The Board believes that each director, including the nominees for election as Class III directors (Proposal Number One), has valuable skills and experiences that, taken together, provide the Company with the variety and depth of knowledge, judgment, and strategic vision necessary to provide effective oversight of the Company’s business operations. Our directors have extensive experience in different fields, including apparel and retail, brand marketing, logistics and technology, global sourcing, and finance and accounting. The Board also believes that, as indicated in the following biographies, each director has demonstrated significant leadership in positions such as chief executive officers, division presidents, and other senior executive officers. In addition, many of our directors have significant experience in the oversight of public companies due to their service as directors of Carter’s and other companies. Amy Woods Brinkley became a director in February 2010. Ms. Brinkley is the manager and owner of AWB Consulting, LLC, which provides executive advisory and risk management consulting services. Ms. Brinkley retired from Bank of America Corporation in 2009 after spending more than 30 years with the company. Ms. Brinkley served as its Chief Risk Officer from 2002 through mid-2009. Prior to 2002, Ms. Brinkley served as President of Bank of America’s Consumer Products division and was responsible for the credit card, mortgage, consumer finance, telephone, and eCommerce businesses. Before that, Ms. Brinkley held positions of Executive Vice President and Chief Marketing Officer overseeing Bank of America’s Olympic sponsorship and its national rebranding and name change. Ms. Brinkley is currently a director of TD Bank Group and the Bank of America Charitable Foundation. She also serves as a trustee for the Princeton Theological Seminary and on the board of commissioners for the Carolinas Healthcare System. Director Qualifications: Ms. Brinkley brings to the Board valuable perspective and insight with respect to finance and accounting, eCommerce, brand marketing, and risk management as a result of her years of service in various senior executive positions at Bank of America Corporation. She also possesses leadership experience attained through her service with Princeton Theological Seminary and the Carolinas Healthcare System. Michael D. Casey became a director in August 2008 and was named Chairman of the Board of Directors in August 2009. Mr. Casey joined the Company in 1993 as Vice President of Finance. Mr. Casey was named Senior Vice President of Finance in 1997, Senior Vice President and Chief Financial Officer in 1998, Executive Vice President and Chief Financial Officer in 2003, and Chief Executive Officer in 2008. Prior to joining the Company, Mr. Casey worked for Price Waterhouse LLP, a predecessor firm to PwC, from 1982 to 1993. Director Qualifications: Mr. Casey provides the Board with valuable perspective and insight with respect to our business, industry, challenges, and opportunities as a result of his years serving in a variety of senior executive positions at the Company. Mr. Casey also represents management’s perspective on important matters to the Board. Vanessa J. Castagna became a director in November 2009. Ms. Castagna served as Executive Chairwoman of Mervyns, LLC from 2005 until 2007. Ms. Castagna previously served as Chairwoman and Chief Executive 6 46496_10k.pdf Page 132 Officer of JCPenney Stores, Catalog and Internet for J.C. Penney Company, Inc. from 2002 through 2004. While at JCPenney, Ms. Castagna also served as its Chief Operating Officer from 1999 to 2002. Prior to that, Ms. Castagna held various senior-level merchandising positions at Target, Walmart, and Marshall’s. Ms. Castagna is currently a director of Levi Strauss & Co. and serves on the board of trustees of Purdue University. Director Qualifications: Ms. Castagna has over 30 years of experience in the retail industry, and with her executive-level service to Mervyns, JC Penney and Walmart, brings to the Board valuable perspective and insight with respect to the apparel and retail industry, merchandising, and brand marketing. She also possesses leadership experience as demonstrated by her service on the board of directors of Levi Strauss & Co. In addition, her experience as a trustee of Purdue University provides our board with a valuable understanding and a unique perspective on governance matters. A. Bruce Cleverly became a director in March 2008. Mr. Cleverly retired as President of Global Oral Care from Procter & Gamble Company/The Gillette Company in September 2007, a position he held since 2005. Mr. Cleverly joined The Gillette Company in 1975 as a Marketing Assistant and held positions of increasing responsibility in brand management and general management in the United States, Canada, and the United Kingdom. In 2001, Mr. Cleverly became President of Gillette’s worldwide Oral Care business. In October 2005, Mr. Cleverly became President of The Procter & Gamble Company’s Global Oral Care division. Mr. Cleverly is a director of Rain Bird Corporation, Shaser BioScience, Inc., and WaterPik, Inc. Director Qualifications: Mr. Cleverly spent over 30 years at Procter & Gamble Company and The Gillette Company, during which time he acquired extensive experience in general management, consumer products, international operations, brand management, and brand marketing. His thorough understanding and appreciation for the leadership role of the Board can be seen through his service on the above-listed boards of directors. Jevin S. Eagle became a director in July 2010. Mr. Eagle served as Chief Executive Officer and director of DavidsTea Inc., a specialty tea retailer in the U.S. and Canada, from April 2012 to April 2014. Mr. Eagle previously held several senior leadership positions at Staples, Inc. from 2002 to 2012, serving most recently as Executive Vice President, Merchandising and Marketing. Prior to joining Staples, Mr. Eagle worked for McKinsey & Company, Inc. from 1994 to 2001 where he became a partner in the firm’s retail practice. Director Qualifications: As the former Chief Executive Officer and director of DavidsTea and Executive Vice President, Merchandising and Marketing of Staples, Mr. Eagle brings to the board broad experience in a number of areas, including retail, management, merchandising, strategic planning, and brand marketing. His extensive experience in the retail industry provides our Board with critical insights. Paul Fulton became a director in May 2002. Mr. Fulton retired as President of Sara Lee Corporation in 1993 after spending 34 years with the company. He is currently non-executive chairman of the board of directors of Bassett Furniture Industries, Inc. and a director of Premier Commercial Bank. Mr. Fulton was previously a director of Bank of America Corporation, where he served from 1993 to 2007; Lowe’s Companies, Inc., where he served from 1996 to 2007; and Sonoco Products Company, Inc., where he served from 1989 to 2005. P r o x y Director Qualifications: As the former President of Sara Lee Corporation and current non-executive chairman of the board of Bassett Furniture Industries, Inc., Mr. Fulton brings to the Board valuable perspective and insight with respect to the retail industry, executive compensation, and management. His service as a director of Bank of America and Lowes Companies demonstrates his thorough understanding of the operations of large public companies. William J. Montgoris became a director in August 2007. Mr. Montgoris retired as Chief Operating Officer of The Bear Stearns Companies, Inc. in 1999, a position he held since August 1993, after spending 20 years with the company. While at Bear Stearns, Mr. Montgoris also served as the company’s Chief Financial Officer from April 1987 until October 1996. Mr. Montgoris currently serves as the non-executive chairman of the board of 7 46496_10k.pdf Page 133 directors of Stage Stores, Inc. Mr. Montgoris is also on the board of trustees of Colby College. Mr. Montgoris was previously a director of OfficeMax Incorporated, where he served from July 2007 to November 2013. Director Qualifications: Mr. Montgoris has over 20 years of experience in the investment banking industry, and brings to the Board valuable perspective and insight with respect to finance and accounting. Mr. Montgoris’ financial expertise offers our Board a deep understanding of financial and audit-related matters. As chairman of the board of directors for Stage Stores, Mr. Montgoris also brings valuable insight with respect to the retail apparel industry. David Pulver became a director in January 2002. Mr. Pulver has been a private investor for more than 25 years and is the President of Cornerstone Capital, Inc. Mr. Pulver was previously a director of Hearst-Argyle Television, Inc., where he served from 1997 through 2009 and Costco Wholesale Corporation, where he served from 1983 through 1993. Mr. Pulver currently serves as a trustee of Colby College and as a director of the Bladder Cancer Advocacy Network (BCAN). Mr. Pulver was a founder of The Children’s Place, Inc. and served as its Chairman and Co-Chief Executive Officer until 1982. Director Qualifications: As a founder and former Chairman and Co-Chief Executive Officer of The Children’s Place, Mr. Pulver brings to the Board valuable perspective and insight with respect to children’s apparel and the retail industry. Mr. Pulver’s former and current service on various boards of directors has given him valuable experience with respect to finance and accounting, management, and oversight of public companies. John R. Welch became a director in February 2003. Mr. Welch retired as President of Mast Industries (Far East) Ltd., a leading global sourcing company, in April 2002 after spending 18 years with the company. Mr. Welch also served as Executive Vice President of Operations at Warnaco Knitwear, a division of Warnaco, Inc. from August 1978 to December 1983. Mr. Welch is currently a director of Brandot International Ltd. Director Qualifications: Mr. Welch brings extensive apparel industry and global sourcing experience to the Board as a result of his years of service at Mast Industries and Warnaco Knitwear. His in-depth knowledge of the retail industry provides our Board with critical insights into key aspects of our business. Thomas E. Whiddon became a director in August 2003. Mr. Whiddon retired as Executive Vice President- Logistics and Technology of Lowe’s Companies, Inc. in March 2003, a position he held since 2000. From 1996 to 2000, Mr. Whiddon served as Lowe’s Chief Financial Officer. Since his retirement, Mr. Whiddon has worked as a consultant, serving various companies in executive capacities on an interim basis. Mr. Whiddon is currently a director of Sonoco Products Company, Inc., Dollar Tree Stores, Inc., and BayCare Health System. Director Qualifications: Mr. Whiddon has many years of experience in the retail industry and brings to the Board valuable perspective and insight with respect to our industry, management, logistics, technology, and finance and accounting. Also, Mr. Whiddon’s financial expertise offers our Board a deep understanding of audit- related matters. Board Leadership Structure The Company’s Corporate Governance Principles provide that positions of Chairman of the Board of Directors and Chief Executive Officer may be combined if the non-management directors determine it is in the best interest of the Company. In August 2009, the non-management directors appointed Mr. Casey, who was the then-current Chief Executive Officer and a sitting Board member, as Chairman. The Board believes it is appropriate to continue to combine the positions of the Chairman and Chief Executive Officer. Mr. Casey has over 20 years of management, finance, and administrative leadership experience at the Company. In addition, Mr. Casey has extensive knowledge of, and experience with, all other aspects of the Company’s business, including with its employees, customers, vendors, and shareholders. Having Mr. Casey serve as both Chairman and Chief Executive Officer helps promote unified leadership and direction for both the Board and management. 8 46496_10k.pdf Page 134 In connection with Mr. Casey’s appointment as Chairman, the non-management directors also created the position of Lead Independent Director (“Lead Director”) and appointed Mr. Whiddon to serve in that role. The non-management directors created the Lead Director position to, among other things, ensure that the non- management directors maintain proper oversight of management and Board process. The responsibilities of the Lead Director include: • • • • • • • • serving as an advisor to the Chief Executive Officer on Board, executive management, and other significant matters; serving, as necessary, as a liaison between non-management directors and the Chief Executive Officer; providing annual Board assessment and other feedback to the Chief Executive Officer; advising the Chief Executive Officer on the Board’s informational needs; consulting on Board meeting materials, schedules, and agendas; calling and presiding over executive sessions of non-management directors; presiding at Board meetings in the absence of the Chairman; and after consultation with the Chief Executive Officer, communicating with major shareholders or other interested parties, as appropriate. Board Meetings Our Corporate Governance Principles require Carter’s to have at least four regularly scheduled Board meetings each year, and each director is expected to attend each meeting. The Board met four times during fiscal 2014. In fiscal 2014, no director participated in less than 75% of the aggregate number of all of the Board and applicable committee meetings. Although the Company does not have a policy regarding director attendance at annual meetings, all directors attended the Company’s Annual Meeting in fiscal 2014. Executive Sessions Executive sessions of non-management directors are held at least four times a year. Any non-management director can request that an additional executive session be scheduled. The Board’s Lead Director presides at the executive sessions of non-management directors. P r o x y 9 46496_10k.pdf Page 135 Board Committees Our Board has the following standing committees: Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. The charters for each committee are available in the Investor Relations section of our website at www.carters.com or in print by contacting Mr. Wu at the Company’s address set forth in the Notice of Annual Meeting. The Board may also establish other committees to assist in the discharge of its responsibilities. The table below identifies the current committee members and committee chairmen. Compensation Audit ✓ Nominating & Corporate Governance Director Amy Woods Brinkley (a) . . . . . . . . . . . . . . . . . . . . . . Vanessa J. Castagna . . . . . . . . . . . . . . . . . . . . . . . . . . A. Bruce Cleverly (b) . . . . . . . . . . . . . . . . . . . . . . . . . Jevin S. Eagle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paul Fulton (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William J. Montgoris . . . . . . . . . . . . . . . . . . . . . . . . . David Pulver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . John R. Welch (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . Thomas E. Whiddon . . . . . . . . . . . . . . . . . . . . . . . . . . ✓ ✓ C ✓ ✓ C ✓ Number of Fiscal 2014 Committee Meetings . . . . . . 10 4 ✓ ✓ C ✓ 6 (a) Ms. Brinkley will join the Compensation Committee immediately following the Annual Meeting. (b) Mr. Cleverly will become Chair of the Nominating and Corporate Governance Committee immediately following the Annual Meeting. (c) Mr. Fulton will join the Nominating and Corporate Governance Committee immediately following the Annual Meeting. (d) Mr. Welch will serve as Chair of the Nominating and Corporate Governance Committee and as a member of the Compensation Committee until May 2015. On February 18, 2015, he announced that he would not be standing for reelection as a Class III Director. Audit Committee The members of our Audit Committee are Ms. Brinkley and Messrs. Montgoris, Pulver, and Whiddon. Mr. Pulver serves as Chairman of the Committee. During fiscal 2014, the Audit Committee held ten meetings. The Audit Committee is responsible for, among other things: • • • • • • • oversight of quality and integrity of, and risks related to, the consolidated financial statements, including the accounting, auditing, and financial reporting practices of the Company; oversight of the Company’s internal control over financial reporting; oversight of the Company’s audit process; oversight of the processes, procedures, and capabilities of the Company’s enterprise risk management program; appointment of the independent auditor and oversight of their performance, including their qualifications and independence; oversight of the Company’s compliance with legal and regulatory requirements, except to the extent oversight is delegated to other Board committees; and oversight of the performance of the Company’s internal audit function. 10 46496_10k.pdf Page 136 The Audit Committee operates pursuant to a written charter that addresses the requirements of the New York Stock Exchange’s (“NYSE”) listing standards. The Board has determined that each member of the Audit Committee is independent and meets the financial literacy requirements set forth in the NYSE’s listing standards. The Board has also determined that each of Messrs. Montgoris, Pulver, and Whiddon is an “audit committee financial expert” as defined under SEC rules. The Audit Committee Report is included in this proxy statement on page 39. Compensation Committee The members of our Compensation Committee are Messrs. Cleverly, Eagle, Fulton, and Welch. Mr. Fulton serves as Chairman of the Committee. During fiscal 2014, the Compensation Committee held four meetings. The Compensation Committee is responsible for, among other things: • • • • • • • • establishing the Company’s philosophy, policies, and strategy relative to executive compensation, including the mix of base salary, short-term and long-term incentive compensation within the context of stated guidelines for compensation relative to peer companies, as determined from time to time by the Committee; evaluating the performance of the Chief Executive Officer and other executive officers relative to approved performance goals and objectives; setting the compensation of the Chief Executive Officer and other executive officers based upon the evaluation of performance, market benchmarks, and other factors; assisting the Board in developing and evaluating candidates for key executive positions and ensuring a succession plan is in place for the Chief Executive Officer and other executive officers; evaluating compensation plans, policies, and programs with respect to executive officers, independent directors, and certain key personnel; monitoring and evaluating benefit programs for the Company’s executive officers and certain key personnel; reviewing and discussing with management, and recommending to the Board for inclusion in the proxy statement, proposals relating to shareholder advisory votes on executive compensation (the “say-on- pay” proposal) and on the frequency of the “say-on-pay” proposal; and P r o x y reviewing and discussing with management the Company’s Compensation Discussion and Analysis (“CD&A”) and producing an annual report on executive compensation for inclusion in the proxy statement, as applicable. This year’s Compensation Committee Report is included in this proxy statement on page 28. The CD&A, which begins on page 18, discusses how the Compensation Committee makes compensation- related decisions regarding our executive officers. The Compensation Committee operates pursuant to a written charter that addresses the requirements of the NYSE’s listing standards. The Board has determined that each member of the Compensation Committee is independent as defined in the NYSE’s listing standards. 11 46496_10k.pdf Page 137 Compensation Committee Interlocks and Insider Participation None of the members of our Compensation Committee serving during fiscal 2014 has been an officer or other employee of the Company. None of our executive officers has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board. Nominating and Corporate Governance Committee The members of our Nominating and Corporate Governance Committee are Ms. Castagna and Messrs. Cleverly, Welch, and Whiddon. Mr. Welch serves as Chairman of the Committee. During fiscal 2014, the Nominating and Corporate Governance Committee held six meetings. The Nominating and Corporate Governance Committee is responsible for, among other things: • • • identifying and recommending candidates qualified to become Board members; recommending directors for appointment to Board committees; and developing and recommending to the Board a set of corporate governance principles and monitoring the Company’s compliance with and effectiveness of such principles. The Nominating and Corporate Governance Committee operates pursuant to a written charter that addresses the requirements of the NYSE’s listing standards. The Board has determined that each member of the Committee is independent as defined in the NYSE’s listing standards. Consideration of Director Nominees The Nominating and Corporate Governance Committee regularly assesses the appropriateness of the size of the Board of Directors. In the event that vacancies occur or are anticipated, the Committee will consider prospective nominees that come to its attention through current Board members, search firms, or certain shareholders. The Board believes that it is appropriate to limit the group of shareholders who can propose nominees due to time constraints on the Nominating and Corporate Governance Committee. The Committee will consider persons recommended by shareholders who hold more than 1% of our common stock for inclusion as nominees for election to the Board if the names of such persons are submitted to Mr. Wu at the Company’s address set forth in the Notice of Annual Meeting. This submission must be made in writing and in accordance with our by-laws, including mailing the submission in a timely manner, share ownership at the time of the Annual Meeting, and including the nominee’s name, address, and qualifications for Board membership. When evaluating a potential candidate for membership on the Board, the Committee considers each candidate’s skills and experience and assesses the needs of the Board and its committees at that point in time. Although the Committee does not have a formal policy on diversity, it believes that diversity is an important factor in determining the composition of the Board, and seeks to have Board members with diverse backgrounds, experiences, and points of view. In connection with its assessment of all prospective nominees, the Committee will determine whether to interview such prospective nominees, and if warranted, one or more members of the Committee, and others as appropriate, will interview such prospective nominees in person or by telephone. Once this evaluation is completed, if warranted, the Committee selects the nominees for election at the Annual Meeting. Shareholder Communication with Directors A shareholder or other interested party may submit a written communication to the Board, the Lead Director, or individual non-management directors. The submission must be delivered to Mr. Wu at the Company’s address set forth in the Notice of Annual Meeting. 12 46496_10k.pdf Page 138 The Board, the Lead Director, or non-management directors may require the submitting shareholder to furnish such information as may be reasonably required or deemed necessary to sufficiently review and consider the submission of such shareholder. Each submission will be forwarded, without editing or alteration, to the Board, the Lead Director, or individual non-management directors, as appropriate, at, or prior to, the next scheduled meeting of the Board. The Board, the Lead Director, or individual non-management directors, as appropriate, will determine, in their sole discretion, the method by which such submission will be reviewed and considered. Risk Oversight The Company’s management is responsible for identifying, assessing, managing, and mitigating the Company’s strategic, financial, operational, and compliance risks. The Board is responsible for overseeing risk management at the Company and management’s efforts in these areas. The Board exercises direct oversight of strategic risks to the Company and other risk areas not delegated to one of its committees. The Board’s Audit Committee is responsible for overseeing the processes, procedures, and capabilities of the Company’s enterprise risk management program, risks related to financial statements, financial reporting, and internal controls, as well as compliance with legal and regulatory requirements. The Compensation Committee oversees risks associated with the Company’s compensation policies and practices with respect to both executive compensation and compensation generally, as well as compliance with legal and regulatory requirements as they relate to compensation. The Compensation Committee reviews the Company’s compensation policies and practices with management to confirm that there are no risks arising from such compensation policies and practices that are reasonably likely to have a material adverse effect on the Company. The Nominating and Corporate Governance Committee is responsible for overseeing compliance with legal and regulatory requirements as such requirements relate to corporate governance, and for overseeing risks related to the Company’s social compliance program. The Board and its Committees receive updates from senior management on relevant risks and management efforts in these areas at its Board and Committee meetings at least annually and more frequently, as appropriate. Corporate Governance Principles and Code of Ethics The Company is committed to conducting its business with the highest level of integrity and maintaining the highest standards of corporate governance. Our Corporate Governance Principles and Code of Ethics provide the structure within which our Board and management operate the Company. The Company’s Code of Ethics applies to all directors and Company employees, including each of the Company’s executive officers. Our Corporate Governance Principles and Code of Ethics are available in the Investor Relations section of our website at www.carters.com or in print by contacting Mr. Wu at the Company’s address set forth in the Notice of Annual Meeting. Director Independence The NYSE listing standards and the Company’s Corporate Governance Principles require a majority of the Company’s directors to be independent from the Company and the Company’s management. For a director to be considered independent, the Board must determine that the director has no direct or indirect material relationship with the Company. The Board considers all relevant information provided by each director regarding any relationships each director may have with the Company or management. As a result of this review, our Board has determined that all of our non-management directors are independent and meet the independence requirements under the listing standards of the NYSE and rules and regulations of the SEC. P r o x y 13 46496_10k.pdf Page 139 PROPOSAL NUMBER ONE ELECTION OF CLASS III DIRECTORS The Board proposes that the two Class III director nominees be re-elected to the Board to serve until the Annual Meeting in 2018, or until his earlier resignation, death, or removal. Each nominee currently serves as a Class III director. In addition to the two Class III nominees, the Company’s current Class I and Class II directors are listed below. Class III Nominees—Terms Expiring at the Annual Meeting Name Paul Fulton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thomas E. Whiddon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Age 80 62 The individuals who will continue to serve as Class I and Class II directors after the Annual Meeting are: Class I Directors—Terms Expiring at the Annual Meeting in 2016 Name Vanessa J. Castagna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William J. Montgoris . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . David Pulver Class II Directors—Terms Expiring at the Annual Meeting in 2017 Name Amy Woods Brinkley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michael D. Casey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. Bruce Cleverly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jevin S. Eagle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Age 65 68 73 Age 59 54 69 48 The Board recommends a vote FOR the election of Paul Fulton and Thomas E. Whiddon as Class III directors. Vote Required Pursuant to our by-laws and our Corporate Governance Principles, the nominees who receive a majority of the votes properly cast at the Annual Meeting will be elected as Class III directors. This means that the number of votes properly cast “for” a director nominee must exceed the number of votes cast “against” that nominee and votes to “abstain” with respect to that nominee. Abstentions and broker non-votes will be counted towards a quorum, and abstentions will have the practical effect of a vote “against” a director nominee. Any nominee who does not receive a majority of votes cast “for” his election is required to tender his resignation. The Nominating and Corporate Governance Committee is then required to make a recommendation to the Board as to whether it should accept or reject such resignation. The Board, taking into account such recommendation, will decide whether to accept such resignation. The Board’s decision will be publicly disclosed within ninety (90) days after the results of the election are certified. A director whose resignation is under consideration shall abstain from participating in any recommendation or decision regarding his resignation. If the resignation is not accepted, the director will continue to serve until the next Annual Meeting of Shareholders at which such director faces re- election and until such director’s successor is elected and qualified. 14 46496_10k.pdf Page 140 COMPENSATION OF DIRECTORS Each of our non-management directors receives an annual retainer, meeting fees, and an annual equity grant. Each of our committee chairmen and our Lead Director receives an additional annual retainer. With respect to each director who served on the Board in fiscal 2014, each such director’s annual retainer was comprised of a $55,000 cash payment and a fully-vested grant of our common stock valued at approximately $120,000. Each director received meeting fees of $2,500 for each regularly scheduled Board meeting, and $1,000 for each regularly scheduled or special meeting of our standing Board committees. In fiscal 2014, the chairman of our Audit Committee and our Lead Director each received $20,000 cash retainers, and the chairmen of our Compensation and Nominating and Corporate Governance Committees each received $15,000 cash retainers. We reimburse directors for travel expenses incurred in connection with attending Board and committee meetings and for other expenses incurred while conducting Company business. Mr. Casey receives no additional compensation for serving on the Board. There are no family relationships among any of the directors or our executive officers and none of our non-management directors performed any services for the Company other than services as directors. The following table provides information concerning the compensation of our non-management directors for fiscal 2014. FISCAL 2014 DIRECTOR COMPENSATION TABLE Name Amy Woods Brinkley . . . . Vanessa J. Castagna . . . . . . A. Bruce Cleverly . . . . . . . Jevin S. Eagle . . . . . . . . . . . Paul Fulton . . . . . . . . . . . . . William J. Montgoris . . . . . . . . . . . . . . . . David Pulver John R. Welch . . . . . . . . . . Thomas E. Whiddon . . . . . Fees Earned or Paid in Cash ($) (a) $73,000 $69,000 $73,000 $69,000 $84,000 $73,000 $93,000 $88,000 $97,000 Stock Awards ($) (b) $120,061 $120,061 $120,061 $120,061 $120,061 $120,061 $120,061 $120,061 $120,061 Total ($) $193,061 $189,061 $193,061 $189,061 $204,061 $193,061 $213,061 $208,061 $217,061 (a) This column reports the amount of cash compensation earned in fiscal 2014 through annual cash retainers and meeting fees. (b) On May 14, 2014, we issued 1,651 shares of common stock to each non-management director with a grant date fair value of $72.72 per share. P r o x y For complete beneficial ownership information of our common stock for each director, see heading “Securities Ownership of Beneficial Owners, Directors, and Executive Officers” on page 36. Utilizing data on non-management director compensation from the Company’s peer group, as well as considering general industry trends presented by Hay Group, an independent compensation consultant, the Compensation Committee determined not to increase non-management director compensation for fiscal 2014. Under the Company’s minimum ownership guidelines, no director may sell Company stock unless he or she owns shares of Company stock with a total market value in excess of five times his or her annual cash retainer, or $275,000, by the end of his or her second term of service on the Board. Each of our directors complied with these ownership guidelines in fiscal 2014. 15 46496_10k.pdf Page 141 EXECUTIVE OFFICERS’ BIOGRAPHICAL INFORMATION AND EXPERIENCE The following table sets forth the name, age, and position of each of our executive officers as of the date of this proxy statement. Name Michael D. Casey . . . . . . . . . Brian J. Lynch . . . . . . . . . . . . Kevin D. Corning . . . . . . . . . Julie A. D’Emilio . . . . . . . . . William G. Foglesong . . . . . . Richard F. Westenberger . . . Jeffrey B. Williams . . . . . . . . Jill A. Wilson . . . . . . . . . . . . Michael C. Wu . . . . . . . . . . . Age 54 52 52 48 45 46 41 48 48 Position Chairman of the Board of Directors and Chief Executive Officer President Executive Vice President, International Senior Vice President of Sales Senior Vice President of Marketing Executive Vice President and Chief Financial Officer Senior Vice President of Retail Senior Vice President of Human Resources and Talent Development Senior Vice President of Legal and Corporate Affairs, General Counsel, and Secretary Michael D. Casey joined the Company in 1993 as Vice President of Finance. Mr. Casey was named Senior Vice President of Finance in 1997, Senior Vice President and Chief Financial Officer in 1998, Executive Vice President and Chief Financial Officer in 2003, and Chief Executive Officer in 2008. Mr. Casey became a director in 2008 and was named Chairman of the Board of Directors in 2009. Prior to joining the Company, Mr. Casey worked for Price Waterhouse LLP, a predecessor firm to PwC, from 1982 to 1993. Brian J. Lynch joined the Company in 2005 as Vice President of Merchandising. Mr. Lynch was promoted to Senior Vice President in 2008. In 2009, Mr. Lynch was promoted to Executive Vice President and Brand Leader for Carter’s. In 2012, Mr. Lynch was promoted to President. Prior to joining the Company, Mr. Lynch was with The Walt Disney Company in various merchandising, brand management, and strategy roles in the Disney Parks & Resorts division. Prior to Disney, Mr. Lynch worked for Champion Products, a division of Hanesbrands Inc. Kevin D. Corning joined the Company in 2012 as Executive Vice President, International. From 2008 to 2012, Mr. Corning served as a General Manager in the Luxury & Lifestyle division of DKSH, a leading market expansion services company, where he was responsible for the manufacturing, marketing, and retail distribution of leading brands in Asia, including Levi’s and Dockers. From 2005 to 2007, Mr. Corning served as President of Masterfoods Brazil, a division of Mars, Incorporated. Mr. Corning started his career with Kraft Foods, Inc. and also worked for Nike, Inc. in various management positions, including country general manager roles in Chile and Brazil. Julie A. D’Emilio joined the Company in 2006 as Vice President of Sales. In 2013, Ms. D’Emilio was promoted to Senior Vice President of Sales. Prior to joining the Company, Ms. D’Emilio was with Calvin Klein Jeans, a division of The Warnaco Group, Inc., in various management positions, including Executive Vice President of Juniors’ and Girls, and Vice President of the Women’s Division. Ms. D’Emilio began her career with Liz Claiborne Inc. and also worked for London Fog Industries, Inc. and Jones Apparel Group, a predecessor of The Jones Group Inc. William G. Foglesong joined the Company in 2010 as Senior Vice President of Marketing, with responsibility for marketing and eCommerce. From 2008 to 2010, Mr. Foglesong was the Vice President of Marketing and Direct-To-Consumer at Spanx, Inc., a leading woman’s apparel company. From 2002 to 2008, Mr. Foglesong worked at The Home Depot, Inc. where he held various management positions, including General Manager of Home Depot Direct. Mr. Foglesong started his career with General Electric and gained additional experience at The Boston Consulting Group where he focused on building internet strategies for his clients. 16 46496_10k.pdf Page 142 Richard F. Westenberger joined the Company in 2009 as Executive Vice President and Chief Financial Officer. Mr. Westenberger’s responsibilities include management of the Company’s finance and information technology functions. Prior to joining the Company, Mr. Westenberger served as Vice President of Corporate Finance and Treasurer of Hewitt Associates, Inc. from 2006 to 2008. From 1996 to 2006, Mr. Westenberger held various senior financial management positions at Sears Holdings Corporation and its predecessor organization, Sears, Roebuck and Co., including Senior Vice President and Chief Financial Officer of Lands’ End, Inc., Vice President of Corporate Planning & Analysis, and Vice President of Investor Relations. Prior to Sears, Mr. Westenberger was with Kraft Foods, Inc. He began his career at Price Waterhouse LLP, a predecessor firm to PwC, and is a certified public accountant. Jeffrey B. Williams joined the Company in 2004 as Director of Supply Chain. Mr. Williams was promoted to Vice President of Inventory Management in 2004 and was named Vice President of Operations in 2006. Mr. Williams was promoted to Senior Vice President, Retail Planning and Allocation in 2007 and was named Senior Vice President, Retail Operations and Strategy in 2011. In 2012, Mr. Williams was promoted to Senior Vice President of Retail. Prior to joining the Company, Mr. Williams served in various positions at The Home Depot, Inc. and Bain & Company. Jill A. Wilson joined the Company in 2009 as Vice President of Human Resources. In 2010, Ms. Wilson was promoted to Senior Vice President of Human Resources and Talent Development. Ms. Wilson joined the Company after more than 20 years with The May Company and Macy’s. While at Macy’s, Ms. Wilson held various human resource positions of increasing responsibility, including Group Vice President of Human Resources. Ms. Wilson has extensive experience in a broad range of human resource disciplines to include global talent management, organizational development, learning and development, compensation, benefits, talent acquisition, and mergers. Michael C. Wu joined the Company in 2014 as Senior Vice President of Legal and Corporate Affairs, General Counsel, and Secretary. From 2006 to 2014, Mr. Wu served as General Counsel and Secretary of Rosetta Stone Inc. From 1999 to 2006, Mr. Wu served in several legal and executive positions with Teleglobe International Holdings Ltd., a publicly traded telecommunications company, including as Vice President and General Counsel. Prior to joining Teleglobe, Mr. Wu was a Senior Counsel for Global One Communications LLC, an international telecommunications joint venture between Sprint Corporation, Deutsche Telekom, and France Telecom. Mr. Wu also previously worked at Baker Botts, LLP and Swider & Berlin, Chdt., which eventually merged into Morgan, Lewis & Bockius LLP. P r o x y 17 46496_10k.pdf Page 143 COMPENSATION DISCUSSION AND ANALYSIS Overview This Compensation Discussion and Analysis, or CD&A, is intended to provide information regarding the Company’s executive compensation program and practices. This CD&A covers a variety of topics, including the Company’s compensation philosophy regarding executive compensation, the role of our Compensation Committee in setting compensation of our executive officers, including our NEOs, and our executive compensation decisions for fiscal 2014. Our NEOs for fiscal 2014 were: • Michael D. Casey, Chief Executive Officer; • • • Richard F. Westenberger, Executive Vice President and Chief Financial Officer; Brian J. Lynch, President; Kevin D. Corning, Executive Vice President, International; • Michael C. Wu, Senior Vice President of Legal and Corporate Affairs, General Counsel, and Secretary Mr. Wu joined the Company as Senior Vice President of Legal and Corporate Affairs, General Counsel, and Secretary on February 3, 2014. Executive Compensation Highlights for 2014 The Compensation Committee believes that our executive compensation program is appropriately designed to attract and retain superior executive talent and also to drive performance. After review of various factors, including our financial performance, the Compensation Committee took the following actions, among others, with respect to fiscal 2014 compensation for our NEOs: • • • Reviewed the peer group used by the Compensation Committee as a source of comparative compensation data in 2013, and determined no changes were needed; Paid out annual cash incentive compensation at 121.5% based on the level of achievement of the Company’s 2014 goals for performance in net sales, adjusted EBIT, adjusted EPS, and certain additional business objectives; and Approved grants of stock options and time-based and performance-based restricted shares. 18 46496_10k.pdf Page 144 Compensation Governance What We Do: What We do Not Do No Guaranteed Annual Salary Increases or Guaranteed Bonuses No Re-Pricing of Stock Options Without Shareholder Approval No Hedging, Pledging, or Short Sales of Company Stock No Special Perquisites Provided on an Annual Basis to Our NEOs No Equity Grants Below 100% Fair Market Value Align Pay with Company Performance: A significant portion of our NEOs’ total direct compensation is linked to Company performance in the form of incentive compensation and long- term performance stock. Retain an Independent Compensation Consultant: The Compensation Committee retains an independent consultant to advise it on executive and director compensation matters and to help analyze comparative compensation data to confirm that the design and pay levels of our compensation program are consistent with market practices. Utilize Stock Ownership Guidelines: We have stock ownership guidelines for our executive officers to encourage our executives to maintain a meaningful equity interest in the Company in order to more closely align executives’ interests with those of our shareholders in general. Utilize Equity Retention Guidelines: Our equity retention policy for executive officers requires holding periods for time-based restricted stock and time-based stock option grants. Have Double-Trigger Cash Severance Arrangements in the Event of a Change of Control: Our severance agreements with our NEOs provide for cash severance benefits to be paid only if there is a qualifying termination in connection with a change of control. Compensation Philosophy The Company is committed to achieving long-term, sustainable growth and increasing shareholder value. Our compensation philosophy is to set our NEOs’ total direct compensation at levels that will attract, motivate, and retain superior executive talent in a highly competitive environment. The Company’s compensation program for our NEOs is designed to support these objectives and encourage strong financial performance on an annual and long-term basis, without encouraging excessive risks, by linking a significant portion of our NEOs’ total direct compensation to Company performance in the form of incentive compensation and long-term performance stock. The principal components of the compensation structure for our NEOs are base salary, annual cash incentive compensation, and long-term equity incentive compensation. Together, the Company refers to these three components as total direct compensation. P r o x y Say-on-Pay Results At the 2014 Annual Meeting of Shareholders, over 92% of the votes cast were in favor of the advisory vote to approve executive compensation. While this vote was advisory and not binding, the Compensation Committee carefully considered the result of the say-on-pay vote in the context of our overall compensation philosophy, as well as our compensation policies and decisions. After reflecting on the say-on-pay vote, our Compensation Committee decided that no changes to the 2014 compensation philosophy were necessary. At the 2015 Annual 19 46496_10k.pdf Page 145 Meeting of Shareholders, the Company plans to again hold an annual advisory vote to approve executive compensation. The Compensation Committee plans to continue to consider the results from this year’s and future advisory votes on executive compensation. Role of the Compensation Committee, Independent Consultant and Management Our Compensation Committee sets the total direct compensation of our NEOs. Our Compensation Committee also sets the financial performance targets for our NEOs’ annual cash incentive compensation and vesting terms for their equity awards, including performance-based awards. Our Compensation Committee has engaged Hay Group, an independent compensation consultant, to advise it on executive and director compensation matters. Hay Group also assists the Committee in gathering and analyzing comparative compensation data both from among the companies in Hay Group’s Retail Industry Executive and Management Total Remuneration Survey and from our peer group, each as described in more detail below. With the goal of maintaining the effectiveness of our executive compensation program, and to keep it consistent with our compensation philosophy, our Compensation Committee reviews the reasonableness of compensation for our executive officers, including our NEOs, and compares it with compensation data from Hay Group’s retail survey, as described below, and our peer group. Hay Group serves at the discretion of the Compensation Committee and regularly attends executive sessions with the Compensation Committee. At the direction of the Compensation Committee, our Chief Executive Officer works with Hay Group to review comparative compensation data and makes recommendations for base salary, annual cash incentive compensation, and long-term equity incentive compensation for our NEOs, other than himself. Compensation for our Chief Executive Officer is set by the Compensation Committee, without any involvement by the Chief Executive Officer, based on recommendations made by Hay Group. The Compensation Committee has assessed the independence of Hay Group pursuant to the SEC rules and has determined that the work provided by Hay Group did not raise a conflict of interest. Factors Used in Determining Executive Compensation In setting compensation of all NEOs, our Compensation Committee takes into account multiple objective and subjective factors, including: (i) the nature and scope of each executive’s responsibilities; (ii) comparative compensation data for executives in similar positions at companies in Hay Group’s retail survey, as described below, and in our peer group; (iii) each executive’s experience, performance, and contribution to the Company; (iv) the Company’s performance; (v) prior equity awards and potential future earnings from equity awards; (vi) retention needs; and (vii) any other factors the Committee deems relevant. The Retail Survey and Peer Group Analysis The survey conducted by Hay Group is comprised of 140 companies in the retail and wholesale industry and provides comparable compensation information by controlling for differences in companies’ revenue size and in the scope of responsibility of different executives. Beginning in August 2012, the Compensation Committee, at the advice of Hay Group, began using a subset of Hay Group’s survey for executive compensation market 20 46496_10k.pdf Page 146 assessment. For 2014, this subset included 52 companies (“Retail Survey” as listed in Appendix A). The Compensation Committee believes that these companies are engaged in businesses more similar to the Company’s business than the other companies in Hay Group’s survey because they are largely apparel and related products retailers or department stores who primarily sell apparel and related products. In addition, our Compensation Committee has established a peer group, which is generally comprised of companies in the retail or wholesale industries that primarily conduct business in apparel or related accessories, sell products under multiple brands through retail and outlet stores, and have net sales generally between one-half and two times the Company’s net sales. In fiscal 2014, our peer group was comprised of the following fifteen companies: Aeropostale, Inc. American Eagle Outfitters, Inc. Ann Inc. Ascena Retail Group, Inc. Chico’s FAS, Inc. The Children’s Place, Inc. Coach, Inc. Columbia Sportswear Company Fossil Group, Inc. Guess?, Inc. Hanesbrands Inc. The Jones Group Inc.* Quiksilver, Inc. Under Armour, Inc. Urban Outfitters, Inc. * The Jones Group Inc. was acquired by Sycamore Partners in 2014, and as such, has been removed from the Company’s peer group for 2015. In August 2014, our Compensation Committee conducted with Hay Group its annual review of our peer group and determined, based on the criteria established for inclusion in the peer group, not to alter the composition of the peer group. Total Direct Compensation In setting a total direct compensation target for each NEO, our Compensation Committee considers both objective and subjective factors set forth above, as well as prior equity awards, potential future earnings from equity awards, and retention needs. The Compensation Committee also reviews total direct compensation, and its individual components, at the 25th, 50th, and 75th percentile levels paid to executives in similar positions at the companies in the Retail Survey and our peer group to understand where the compensation it sets falls relative to the market practices. These levels were selected because the Compensation Committee reviews this peer data as a reference point in determining whether the total compensation opportunity is likely to provide sufficient motivation and retention as well as whether it properly reflects the NEO’s role and scope of responsibilities relative to the companies in the Retail Survey and our peer group. The Compensation Committee chose the actual amount of each element of compensation and the total compensation opportunity of each executive officer based, in part, on its review of data for the companies in the Retail Survey and our peer group and in part on the factors discussed above under the heading “Factors Used in Determining Executive Compensation” and below in respect of actual compensation decisions for fiscal 2014. Throughout fiscal 2014, our Compensation Committee reviewed compensation data from the Retail Survey and our peer group to compare the compensation of our NEOs. Base Salary When setting base salaries for our NEOs, our Compensation Committee considers the subjective and objective factors set forth above and also reviews base salaries at the 25th, 50th, and 75th percentile levels paid to executives in similar positions at the companies in the Retail Survey and our peer group, as appropriate. Utilizing base salary data from the Retail Survey and, with respect to Messrs. Casey, Westenberger, and Lynch, base salary data for the Company’s peer group, as well as making adjustments in light of the objective and subjective factors discussed above, the Committee determined to increase base salaries for fiscal 2014 for Messrs. Casey, Westenberger, Lynch, and Corning to better align with market competitive levels. 21 P r o x y 46496_10k.pdf Page 147 Mr. Wu’s base salary for fiscal 2014 was approved by the Compensation Committee based on Mr. Wu’s compensation prior to joining the Company, negotiations with Mr. Wu at the time he was hired, and taking into consideration the data for similar positions at companies set forth in the Retail Survey. Annual Cash Incentive Compensation The Company makes annual cash incentive compensation (through our Amended and Restated Incentive Compensation Plan) a significant component of our NEOs’ targeted total direct compensation in order to motivate our executives to meet and exceed the Company’s annual operating plans. For each NEO, our Compensation Committee approves target annual cash incentive compensation as a percentage of such NEO’s base salary. In establishing these annual cash incentive compensation targets, the Compensation Committee considers our NEOs’ potential total direct compensation in light of the Company’s compensation philosophy and comparative compensation data. Our NEOs may also receive special bonuses in recognition of special circumstances or for superior performance. In February 2014, our Compensation Committee set the following fiscal 2014 annual cash incentive compensation targets for our NEOs: 125% of base salary for Mr. Casey, 100% for Mr. Lynch, 75% for Messrs. Corning and Westenberger, and 50% for Mr. Wu. The NEOs can earn their annual cash incentive compensation based upon the Company’s achievement of financial performance targets pre-determined by the Compensation Committee. In accordance with our Incentive Compensation Plan, for fiscal 2014, the Compensation Committee used three financial performance metrics, plus a new target based on the attainment of certain business objectives to determine the amount, if any, of annual cash incentive compensation to be paid under our Incentive Compensation Plan: net sales (weighted at 20%); earnings before interest and taxes (“EBIT”), adjusted, if applicable, in the same manner as for presentation to the financial markets (weighted at 20%); earnings per share (“EPS”), adjusted, if applicable, in the same manner as for presentation to the financial markets (weighted at 40%); and the completion of a certain percentage of business objectives determined by the Compensation Committee during its February 2014 meeting (weighted at 20%). Our Compensation Committee selected net sales, EBIT, EPS, and business objectives as performance metrics because we believe these metrics to be key measures that are aligned with the interests of our shareholders and help to measure the quality of our earnings. In February 2014, the Compensation Committee added additional metrics to include the realization of specified business objectives. The intent of these objectives is to reward our NEOs for achievement of important strategic initiatives that strengthen the Company’s competitive position. At the beginning of each year, the Compensation Committee determines a set of objectives it deems important to the Company’s long-term success, and each objective is assigned a target level of performance, which is then judged at the beginning of the next year to be either met or not. The Compensation Committee specified six business objectives for 2014: increase customer net promoter score, grow direct-to- consumer transactions, limit product cost increases, increase OshKosh profitability, leverage selling, general and administrative expenses, and improve operating margin. Our Compensation Committee has the discretion not to award or reduce annual cash incentive compensation, even if the Company achieves its financial performance targets, and to take into account personal performance in determining the percentage of each NEO’s annual cash incentive compensation to be paid, if any. For example, our Compensation Committee has discretion to reduce future incentive compensation awards based on financial restatements or misconduct. In addition, in accordance with the requirements of the Sarbanes-Oxley Act of 2002, Messrs. Casey and Westenberger are subject to the adjustment, cancellation, or recovery of incentive awards or payments made to them in the event of a financial restatement. 22 46496_10k.pdf Page 148 Our NEOs could have earned from 0% to 200% of their target annual cash incentive compensation in fiscal 2014 based upon the Company’s achievement of the following targets, weighted at the following percentages: Net Sales ($ in billions) (20%) EBIT ($ in millions) (20%) 25% of Target Annual Cash Incentive Compensation (Threshold) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% of Target Annual Cash Incentive Compensation (Target) . . 200% of Target Annual Cash Incentive Compensation (Maximum) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual 2014 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.801 $2.901 $2.976 $2.894 $326.0 $362.0 $388.0 $359.0 EPS (40%) $3.47 $3.90 $4.20 $3.93 Business Objectives (20%)* 2 4 6 6 * Each business objective is weighted equally. At its meeting in February 2014, the Compensation Committee determined the number of objectives required to be met to hit the Threshold, Target, and Maximum percentages set forth in this table. If less than two objectives had been met, our NEOs would have received no cash incentive compensation bonus for this metric. Based on the Company’s fiscal 2014 performance, our NEOs were awarded 121.5% of their cash incentive compensation targets for fiscal 2014. Actual payouts for the NEOs are shown in the Summary Compensation Table. Long-Term Equity Incentive Compensation Our Equity Incentive Plan allows for various types of equity awards, including stock options, restricted stock, restricted stock units, stock appreciation rights, and deferred stock. Awards under our Equity Incentive Plan are granted to recruit, motivate, and retain employees and in connection with promotions or increased responsibility. Historically, our Compensation Committee has awarded time-based stock options, time and performance-based restricted stock, and time-based restricted stock units, although it could use other forms of equity awards in the future. All awards under our Equity Incentive Plan must be approved by our Compensation Committee. Our Compensation Committee determines the type, timing, and amount of equity awards granted to each of our NEOs after considering their previous equity awards, base salary, and target annual cash incentive compensation in light of the Company’s compensation philosophy. Our Compensation Committee also considers the comparative compensation data in the Retail Survey and our peer group, and our desire to retain and motivate our NEOs and to align their goals with the long-term goals of our shareholders. Our Compensation Committee’s practice is to approve grants of stock options, restricted stock, and restricted stock units at regularly scheduled meetings. Our Compensation Committee may also make equity grants at special meetings or by unanimous written consent. Our Compensation Committee could select a date subsequent to a regularly scheduled meeting on which to grant equity awards. Our Compensation Committee sets the exercise prices of equity awards at the closing price of our common stock on the NYSE on the date of grant. In considering the value of equity awards, we calculate the value of stock option awards by using the Black- Scholes option pricing valuation method and the value of time-based and performance-based restricted stock awards equal to the closing price of our common stock on the date of grant. In February 2014, based on criteria described above, our Compensation Committee approved annual stock option, restricted stock, and performance-based restricted stock grants for each NEO. The following table details the amounts each of our NEOs was granted. A more detailed description of such grants can be seen below in the table “Fiscal 2014 Grants of Plan-Based Awards” and its footnotes. Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance-Based Restricted Stock . . . . . . . . . . . . . . . . . . . . 30,000 15,000 30,000 3,800 1,900 3,800 Michael Casey Richard Westenberger Brian Lynch 7,500 3,750 7,500 Kevin Corning Michael Wu 3,800 1,900 3,800 4,600 2,000 2,500 23 P r o x y 46496_10k.pdf Page 149 Mr. Wu’s equity awards were approved by the Compensation Committee based on Mr. Wu’s compensation prior to joining the Company, negotiations with Mr. Wu at the time of hire, relocation expenses, and consideration of the data for similar positions at companies in the Retail Survey. Each NEO’s performance-based restricted shares granted in February 2014 are eligible to vest in fiscal 2017 in varying percentages (between 25% and 150%) if the Company achieves certain growth in earnings per share (as adjusted for items judged to be non-recurring or unusual in nature), measured from fiscal 2013 to fiscal 2016. Once vested, the performance-based restricted shares granted to Mr. Casey may not be sold for an additional one- year period (except to satisfy tax obligations resulting from vesting of such shares). All of the time-based stock option and time-based restricted stock awards granted to our NEOs in fiscal 2014 are subject to the equity retention policy described below, contingent on the NEO’s continued employment with the Company, and vest in four equal annual installments on the anniversary of the grant date. Stock Ownership Guidelines and Equity Retention Policy Our Compensation Committee regularly reviews the equity ownership of our NEOs compared to the Company’s minimum ownership guidelines. Under the Company’s minimum ownership guidelines, no NEO may sell Company stock (other than to cover the tax obligations resulting from the vesting of Company restricted stock or from exercising vested stock options) unless he owns shares of Company stock with a total market value in excess of a multiple of his base salary and continues to maintain such level of ownership after selling Company stock. For fiscal 2014, the ownership multiples for our NEOs were as follows: Multiple of Base Salary Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President Executive Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7x 4x 3x 1x During fiscal 2014, each of our NEOs was in compliance with his applicable ownership multiple. Our equity retention policy for NEOs requires that, prior to any sale, any time-based restricted stock granted to an NEO after January 1, 2009 be held for four years following the date of grant, except for any withholding to cover tax obligations resulting from the vesting of such shares. The policy also requires that time-based options granted after January 1, 2009 be held for at least one year from the date of vesting. Further, hedging and pledging of Company stock is prohibited under the Company’s policies to ensure that the interests of the holders of Company stock are fully aligned with those of shareholders in general. During 2014, none of our NEOs hedged or pledged any shares of Company stock. 401(k) Plan The Company’s 401(k) matching program provides Company matching of employee contributions at the discretion of the Company, based on the Company’s performance. In February 2015, the Company announced that employee contributions made to the Company’s 401(k) plan in fiscal 2014 would be matched 100% by the Company for all employees up to the maximum amount permitted by the Internal Revenue Service. Accounting and Tax Considerations Accounting, tax, and related financial implications to the Company and our NEOs are considered during the analysis of our compensation and benefits program and individual elements of each. Overall, the Compensation Committee seeks to balance attainment of our compensation objectives with the need to maximize current tax deductibility of compensation that may impact earnings and other measures of importance to shareholders. The 24 46496_10k.pdf Page 150 Compensation Committee determined that the accounting and tax impacts described below regarding Internal Revenue Code Section 162(m) were reasonable in light of our objectives. In general, base salary, annual cash incentive bonus payments, and the costs related to benefits and perquisites are recognized as compensation expense at the time they are earned or provided. Share-based compensation expense is recognized in our consolidated statements of operations for stock options, restricted stock, and performance shares. Internal Revenue Code Section 162(m) Section 162(m) of the Internal Revenue Code of 1986, as amended, imposes a $1 million limit on the amount that a public company may deduct for compensation paid to a company’s principal executive officer and the company’s three most highly compensated executive officers, other than its principal financial officer. This limitation generally does not apply to performance-based compensation that is awarded under a plan that is approved by the shareholders of a company and that also meets certain other technical requirements. While the Compensation Committee is mindful of the benefit to our performance of full deductibility of compensation, the Compensation Committee believes that it should not be constrained by the requirements of Section 162(m) of the Internal Revenue Code where those requirements would impair flexibility in compensating our executive officers in a manner that can best promote our corporate objectives. Therefore, the Compensation Committee has not adopted a policy that requires that all compensation be deductible and approval of compensation, including the grant of stock options or other “performance-based compensation” to our executive officers, by the Compensation Committee is not a guarantee of deductibility under the Internal Revenue Code. The Compensation Committee intends to continue to compensate our executive officers in a manner consistent with the best interests of our shareholders. Severance Agreements with NEOs Each of our current NEOs has a severance agreement with the Company. In the event that a NEO is terminated by the Company for “cause,” retires, becomes disabled, or dies, the executive or his estate will be provided his base salary and medical and other benefits through the termination of his employment. If a NEO is terminated without “cause,” or a NEO terminates for “good reason” (with “cause” and “good reason” defined in each executive’s respective agreement and summarized below) the Company will be obligated to pay such executive’s base salary for 24 months in the case of Mr. Casey, for 18 months in the case of Mr. Lynch, and for 12 months in the cases of Messrs. Corning, Westenberger, and Wu. In each case, base salary will be paid in bi-weekly installments. The Company is also obligated to pay each NEO a pro-rated annual cash incentive compensation amount that would have been earned by each such executive if he had been employed at the end of the year in which his employment was terminated. The determination of whether an annual cash incentive compensation is payable to the NEO will not take into account any individual performance goals and shall be based solely on the extent to which Company performance goals have been met. Additionally, the Company is obligated to pay the medical, dental, and life insurance benefits for 24 months in the case of Mr. Casey, for 18 months in the case of Mr. Lynch, and for 12 months in the case of Messrs. Corning, Westenberger, and Wu. In the event that within two years following a “change of control” (with “change of control” defined in each executive’s agreement) the Company terminates the NEO’s employment, other than for “cause” or such executive terminates his employment for “good reason,” the Company shall pay such NEO’s base salary, medical, dental, and life insurance benefits for 36 months in the case of Mr. Casey, 30 months in the case of Mr. Lynch, and 24 months in the case of Messrs. Corning, Westenberger, and Wu. In the event of a “change of control” of the Company, all unvested stock options and all unvested shares of restricted stock held by the NEO shall fully vest. Severance payments made to the NEOs are subject to the requirements of Section 409A of the Internal Revenue Code of 1986, as amended. 25 P r o x y 46496_10k.pdf Page 151 Under the agreements with each of our NEOs, “cause” is generally deemed to exist when such NEO has: (i) been convicted of a felony or entered a plea of guilty or no contest to a felony; (ii) committed fraud or other act involving dishonesty for personal gain which is materially injurious to the Company; (iii) materially breached his obligations of confidentiality, intellectual property assignment, non-competition, non-solicitation, or non- disparagement against the Company after a cure period, provided such breach by its nature was curable; (iv) willfully engaged in gross misconduct which is injurious to the Company; or (v) after a cure period, willfully refused to substantially perform his duties or is grossly negligent in performance of such duties. Under the agreements with our NEOs, “good reason” is generally deemed to exist when there is (i) a material reduction in the executive’s title, duties, or responsibilities; (ii) a material change in the geographic location at which the executive must perform services; or (iii) a material breach of the executive’s agreement by the Company. Potential Payments Upon Termination or Change of Control Termination As described in more detail above under the heading “Severance Agreements with NEOs,” we have entered into certain agreements and maintain certain plans that may require us in the future to make certain payments and provide certain benefits in the event of a termination of employment. For purposes of the table below, a hypothetical termination without “cause” or for “good reason” is assumed to have occurred as of January 3, 2015, the last day of fiscal 2014. The table below indicates the payment and provision of other benefits that would be owed to each of our NEOs as the result of such a termination. There can be no assurance that a termination of employment of any of our NEOs would produce the same or similar results as those set forth below on any other date. The terms “without cause” and “good reason” are defined in the agreements with our executives and summarized above under the heading “Severance Agreements with NEOs.” Michael Casey Richard Westenberger Brian Lynch Kevin Corning Michael Wu Base Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Incentive Compensation (a) . . . . . . . . . . . Health and Other Benefits . . . . . . . . . . . . . . . . . $1,854,000 1,407,900 17,740 $ 530,000 483,000 9,294 $1,005,000 814,100 13,308 $490,000 446,600 9,205 $400,000 243,000 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,279,640 $1,022,294 $1,832,408 $945,805 $643,000 (a) Cash incentive compensation calculations are based on cash incentive compensation targets achieved in fiscal 2014 described in more detail under the heading “Annual Cash Incentive Compensation” above. Change of Control and Termination Following a Change of Control In the event of a change of control, as that term is defined under the Company’s Equity Incentive Plan and individual awards, all unvested stock options and all unvested shares of restricted stock shall fully vest. In addition, as described in more detail above under the heading “Severance Agreements with NEOs,” we have entered into certain agreements that may require us to make certain payments and provide certain benefits to our NEOs in the event of a change of control (with “change of control” defined in each executive’s agreement). For purposes of the table below, we have assumed that all unvested stock options and all unvested shares of restricted stock have fully vested immediately prior to a change of control on January 3, 2015, the last day of fiscal 2014, and that a termination without “cause” occurred immediately following a change of control on January 3, 2015. The estimated benefit amount of unvested options was calculated by multiplying the number of in-the-money unvested options held by the applicable NEO by the difference between the closing price of our common stock on January 2, 2015, as reported by the NYSE, which was $86.00, and the exercise price of the 26 46496_10k.pdf Page 152 option. The estimated benefit amount of unvested restricted stock was calculated by multiplying the number of restricted shares held by the applicable NEO by the closing price of our common stock on January 2, 2015, as reported by the NYSE, which was $86.00. There can be no assurance that a change of control would produce the same or similar results as those set forth below on any other date or at any other price. Michael Casey Richard Westenberger Brian Lynch Kevin Corning Michael Wu Base Salary . . . . . . . . . . . . . . . . . . . . . . . . . Cash Incentive Compensation (a) . . . . . . . Health and Other Benefits . . . . . . . . . . . . . Option Value . . . . . . . . . . . . . . . . . . . . . . . Restricted Stock Value . . . . . . . . . . . . . . . . $ 2,781,000 1,407,900 26,610 4,197,525 27,627,500 $1,060,000 483,000 18,588 949,898 2,640,200 $1,675,000 814,100 22,180 838,420 4,407,500 $ 980,000 446,600 18,410 467,488 1,823,200 $ 800,000 243,000 — 80,546 387,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,040,535 $5,151,686 $7,757,200 $3,735,698 $1,510,546 (a) Cash incentive compensation calculations are based on cash incentive compensation targets achieved in fiscal 2014 described in more detail under the heading “Annual Cash Incentive Compensation” above. Perquisites and Other Benefits Except for the 401(k) matching program, which applies to all employees, our NEOs do not receive any perquisites or other benefits on an annual basis. During 2014, Mr. Wu was provided with benefits related to his relocation to Atlanta, Georgia including associated tax gross-ups. The cost of providing these benefits and perquisites to the NEOs is included in the amounts shown in the “All Other Compensation” column of the Summary Compensation Table and detailed in the footnotes to such table. P r o x y 27 46496_10k.pdf Page 153 COMPENSATION COMMITTEE REPORT The Compensation Committee of the Board has reviewed and discussed with Company management the Compensation Discussion and Analysis included in this proxy statement. Based on such review and discussions, the Compensation Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement for filing with the SEC. Submitted by the Compensation Committee Mr. Paul Fulton, Chairman Mr. A. Bruce Cleverly Mr. Jevin S. Eagle Mr. John R. Welch 28 46496_10k.pdf Page 154 FISCAL 2014 SUMMARY COMPENSATION TABLE The table below provides information concerning the compensation of our NEOs. In the “Salary” column, we disclose the base salary paid to each of our NEOs during fiscal 2014, 2013, and 2012. In the “Bonus” column, we disclose the cash bonuses earned during fiscal 2014, 2013, and 2012, other than amounts earned pursuant to the Company’s Amended and Restated Incentive Compensation Plan. In the “Stock Awards” and “Option Awards” columns, we disclose the total fair value of the grants made in fiscal 2014, 2013, and 2012, without a reduction for assumed forfeitures. For restricted stock, the fair value is calculated using the closing price on the NYSE of our stock on the date of grant. For time-based and performance-based stock options, the fair value is calculated based on assumptions summarized in Note 9 to our audited consolidated financial statements, which are included in our fiscal 2014 Annual Report on Form 10-K. In the “Non-Equity Incentive Plan Compensation” column, we disclose the dollar value of all compensation earned in fiscal 2014, 2013, and 2012 pursuant to the Company’s Amended and Restated Incentive Compensation Plan. In the “All Other Compensation” column, we disclose the dollar value of all other compensation that could not properly be reported in other columns of the Fiscal 2014 Summary Compensation Table, including perquisites, amounts reimbursed for the payment of taxes, and other payments paid by the Company for the benefit of our NEOs. Non-Equity Incentive Plan Compensation ($) All Other Compensation ($) (e) Fiscal Year Salary ($)(a) Bonus ($) (b) 2014 2013 2012 2014 2013 2012 2014 2013 2012 2014 2013 $ 953,308 $ 882,692 $ 818,846 $ 545,192 $ 502,885 $ 460,962 $ 688,846 $ 650,000 $ 499,038 $ 503,654 $ 475,000 $ $ $ $ $ $ $ $ $ $ $ — — — — — — — — — — — Stock Awards ($) (c) $3,082,050 $4,445,250 $5,752,350 $ 390,393 $ 711,240 $ 511,320 $ 770,513 $1,600,290 $ 511,320 Option Awards ($) (d) $ 594,000 $1,004,273 $1,068,900 $ 75,240 $ 160,684 $ 122,160 $ 148,500 $ 361,538 $ 122,160 $1,407,900 $1,293,800 $2,103,750 $ 483,000 $ 444,200 $ 712,800 $ 814,100 $ 747,500 $ 779,650 $ 390,393 $1,066,860 $ 75,240 $ 401,709 $ 446,600 $ 409,700 Total ($) $6,304,408 $7,798,415 $9,766,346 $1,534,657 $1,851,869 $1,824,242 $2,483,909 $3,406,088 $1,934,688 $1,459,999 $2,551,801 $267,150 $172,400 $ 22,500 $ 40,832 $ 32,860 $ 17,000 $ 61,950 $ 46,760 $ 22,500 $ 44,112 $198,532 2014 $ 369,231 $ 100,000 $ 308,205 $ 91,080 $ 243,000 $274,599 $1,386,114 Name and Principal Position Michael D. Casey . . . . . . . . . . . . . . . . . . . . Chairman of the Board of Directors and Chief Executive Officer Richard F. Westenberger . . . . . . . . . . . . . . . Executive Vice President and Chief Financial Officer Brian J. Lynch . . . . . . . . . . . . . . . . . . . . . . . President Kevin D. Corning . . . . . . . . . . . . . . . . . . . . Executive Vice President, International Michael C. Wu . . . . . . . . . . . . . . . . . . . . . . Senior Vice President, General Counsel and Secretary (a) Base salary for each NEO for fiscal 2014 was based on a 27-week pay period as opposed to a typical 26-week pay period due to the fiscal year ending on January 3, 2015. Mr. Wu’s salary is a pro-rated amount based on a start date of February 3, 2014 and an annual base salary amount of $400,000. (b) Special one-time sign-on bonus. (c) The amounts disclosed in this column represent the total grant date fair value for the following grants: The time-based restricted stock awards vest in four equal, annual installments following the date of the grant. Vesting of the performance-based stock awards granted in fiscal 2012 occurred on February 26, 2015. Vesting of the performance-based stock awards granted in fiscal 2013 and 2014 is contingent upon meeting specific performance targets through fiscal 2015 and 2016, respectively. For Mr. Casey, once vested, the performance-based restricted shares granted after 2011 may not be sold for an additional one-year period (except to satisfy tax obligations resulting from vesting of such shares). 29 46496_10k.pdf Page 155 P r o x y Name Grant Date Michael D. Casey . . . . . . . . . . . . . . Richard F. Westenberger . . . . . . . . . Brian J. Lynch . . . . . . . . . . . . . . . . . Kevin D. Corning . . . . . . . . . . . . . . 2/22/2012 2/20/2013 2/18/2014 2/22/2012 2/20/2013 2/18/2014 2/22/2012 2/20/2013 2/18/2014 2/20/2013 2/18/2014 Michael C. Wu . . . . . . . . . . . . . . . . 2/18/2014 Time-Based Restricted Shares Performance- Based Restricted Shares Grant Date Fair Value per Share 35,000 25,000 15,000 4,000 4,000 1,900 4,000 9,000 3,750 10,000 1,900 2,000 100,000 50,000 30,000 8,000 8,000 3,800 8,000 18,000 7,500 8,000 3,800 2,500 $42.61 $59.27 $68.49 $42.61 $59.27 $68.49 $42.61 $59.27 $68.49 $59.27 $68.49 $68.49 (d) The amounts disclosed in this column represent the total grant date fair value for the following grants. These time-based stock options vest in four equal, annual installments following the date of the grant. Information concerning how the Company uses the Black-Scholes model to determine the fair value of stock options can be found in Note 9 to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Name Grant Date Michael D. Casey . . . . . . . . . . . . . . . Richard F. Westenberger . . . . . . . . . Brian J. Lynch . . . . . . . . . . . . . . . . . . Kevin D. Corning . . . . . . . . . . . . . . . 2/22/2012 2/20/2013 2/18/2014 2/22/2012 2/20/2013 2/18/2014 2/22/2012 2/20/2013 2/18/2014 2/20/2013 2/18/2014 Michael C. Wu . . . . . . . . . . . . . . . . . 2/18/2014 Time-Based Stock Options Granted Black-Scholes Fair Value Option Exercise Price 70,000 50,000 30,000 8,000 8,000 3,800 8,000 18,000 7,500 20,000 3,800 4,600 $15.27 $20.09 $19.80 $15.27 $20.09 $19.80 $15.27 $20.09 $19.80 $20.09 $19.80 $19.80 $42.61 $59.27 $68.49 $42.61 $59.27 $68.49 $42.61 $59.27 $68.49 $59.27 $68.49 $68.49 (e) The amounts shown as “All Other Compensation” for fiscal 2014 consist of the following: Name 401(k) Company Match Michael D. Casey . . . . . . . . . . Richard F. Westenberger . . . . . Brian J. Lynch . . . . . . . . . . . . . Kevin D. Corning. . . . . . . . . . . Michael C. Wu . . . . . . . . . . . . . $23,000 $17,500 $23,000 $23,000 $17,500 Dividends Paid on Unvested Restricted Stock $244,150 $ 23,332 $ 38,950 $ 16,112 3,420 $ Relocation (i) Gross-ups (ii) Tax Assistance Total $ $ $ $ $184,865 — $ — — $ — — $ — — $ — $68,813 $ — $267,150 $ — $ 40,832 $ — $ 61,950 $5,000 $ 44,112 $ — $274,599 (i) Mr. Wu’s relocation reimbursements include reimbursement of moving and temporary housing expenses. (ii) Mr. Wu’s gross-up is related to reimbursements from his relocation from McLean, Virginia to Atlanta, Georgia. 30 46496_10k.pdf Page 156 FISCAL 2014 GRANTS OF PLAN-BASED AWARDS The following table provides information concerning each grant of plan-based awards made to a NEO in fiscal 2014. This includes incentive compensation awards granted under our Incentive Compensation Plan and stock option and restricted stock awards granted under our Equity Incentive Plan. The threshold, target, and maximum columns reflect the range of estimated payouts under these plans for fiscal 2014. The exercise price disclosed is equal to the closing market price of our common stock on the date of the grant. The last column reports the aggregate grant date fair value of all awards made in fiscal 2014 as if they were fully vested on the grant date. Name Equity Award Grant Date Award Type Threshold ($) Target ($) Maximum ($) Threshold (#) Target (#) Maximum (#) Estimated Future Payouts Under Non-Equity Incentive Plan Awards (a) Estimated Future Payouts Under Equity Incentive Plan Awards Michael D. Casey . . . . . . Cash Incentive Compensation Shares (b) Shares (c) Options (d) Richard F. Westenberger . . . . . . . Cash Incentive Compensation Shares (b) Shares (c) Options (d) Brian J. Lynch . . . . . . . . Cash Incentive Compensation Shares (b) Shares (c) Options (d) Kevin D. Corning . . . . . . Cash Incentive Compensation Shares (b) Shares (c) Options (d) Michael C. Wu . . . . . . . . Cash Incentive Compensation Shares (b) Shares (c) Options (d) — $289,688 $ $ $ — $ — $ — $ 2/18/2014 2/18/2014 2/18/2014 $1,158,750 $2,317,500 — — — — $ — $ — $ — $ 99,375 $ $ $ — $ — $ — $ 2/18/2014 2/18/2014 2/18/2014 $ 397,500 $ 795,000 — — — — $ — $ — $ — $167,500 $ $ $ — $ — $ — $ 2/18/2014 2/18/2014 2/18/2014 $ 670,000 $1,340,000 — — — — $ — $ — $ — $ 91,875 $ $ $ — $ — $ — $ 2/18/2014 2/18/2014 2/18/2014 $ 367,500 $ 735,500 — — — — $ — $ — $ — $ 50,000 $ $ $ — $ — $ — $ 2/18/2014 2/18/2014 2/18/2014 $ 200,000 $ 400,000 — — — — $ — $ — $ — — — 15,000 30,000 — 30,000 7,500 — — 950 — — — 1,875 — — — 950 — — — 625 — — 1,900 3,800 3,800 — 3,750 7,500 7,500 — 1,900 3,800 3,800 — 2,000 2,500 4,600 — 15,000 45,000 30,000 — 1,900 5,700 3,800 — 3,750 11,250 7,500 — 1,900 5,700 3,800 — 2,000 3,750 4,600 Exercise or Base Price of Option Awards ($/Sh)(e) Grant Date Fair Value of Stock and Option Awards $ — $ — $ — $1,027,350 $ — $2,054,700 $ 594,000 $68.49 $ — $ — $ — $ 130,131 $ — $ 260,262 75,240 $ $68.49 $ — $ — $ — $ 256,838 $ — $ 513,675 $ 148,500 $68.49 $ — $ — $ — $ 130,131 $ — $ 260,262 75,240 $ $68.49 $ — $ — $ — $ 136,980 $ — $ 171,225 91,080 $ $68.49 (a) (b) (c) (d) (e) The amounts shown under the “Threshold” column represent 25% of the target cash incentive compensation, assuming threshold-level performance is achieved under the financial performance measures. The amounts shown under the “Target” column represent 100% of the target cash incentive compensation, assuming target-level performance is achieved under the financial performance measures. The amounts shown under the “Maximum” column represent 200% of the target cash incentive compensation, assuming maximum-level performance is achieved under the financial performance measures. Shares of time-based restricted stock were granted pursuant to the Company’s Equity Incentive Plan. These restricted shares vest ratably in four equal, annual installments following the date of the grant. Shares of performance-based restricted stock were granted pursuant to the Company’s Equity Incentive Plan. These restricted shares vest upon meeting specific performance targets through fiscal 2016. Once vested, the performance-based restricted shares for Mr. Casey may not be sold for an additional one-year period (except to satisfy tax obligations resulting from vesting of such shares). The amounts shown under the “Threshold” column represent 25% of the target grant award, assuming threshold-level performance is achieved under the performance vesting criteria. The amounts shown under the “Target” column represent 100% of the target grant award, assuming target-level performance is achieved under the performance vesting criteria. The amounts shown under the “Maximum” column represent 150% of the target grant award, assuming maximum-level performance is achieved under the performance vesting criteria. The dollar amounts under the “Grant Date Fair Value of Stock and Option Awards” are calculated based on the number of awards reported under the “Target” column. Time-based stock options were granted pursuant to the Company’s Equity Incentive Plan. These stock options vest ratably in four equal, annual installments following the date of the grant. Information concerning how the Company uses the Black-Scholes model to determine the fair value of stock options can be found in Note 9 to the Company’s consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K. The stock options awarded have an exercise price based on the closing price of the Company’s common stock as traded on the NYSE on the date of grant. P r o x y 31 46496_10k.pdf Page 157 OUTSTANDING EQUITY AWARDS AT FISCAL 2014 YEAR-END The following table provides information regarding unexercised stock options, stock that has not yet vested, and equity incentive plan awards for each NEO outstanding as of the end of fiscal 2014. Each outstanding award is represented by a separate row that indicates the number of securities underlying the award. Stock Awards Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (b) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (c) — — — — — — — — 321,250 — — — — — 30,700 — — — — — — — 51,250 — — 21,200 — 4,500 — $ — $ — $ — $ — $ — $ — $ $ — $27,627,500 — $ — $ — $ — $ $ — $ 2,640,200 — $ — $ — $ — $ — $ — $ $ — $ 4,407,500 — $ $ — $ 1,823,200 $ $ — 387,000 Option Exercise Price ($) Option Expiration Date $22.19 $17.90 $18.14 $28.04 $28.44 $42.61 $59.27 $68.49 $ — $28.04 $28.44 $42.61 $59.27 $68.49 $ — $14.48 $18.14 $28.04 $28.44 $42.61 $59.27 $68.49 $ — $59.27 $68.49 $ — $68.49 $ — 2/15/2017 8/6/2018 3/12/2019 2/16/2020 2/24/2021 2/22/2022 2/20/2023 2/18/2024 — 2/16/2020 2/24/2021 2/22/2022 2/20/2023 2/18/2024 — 5/8/2018 3/12/2019 2/16/2020 2/24/2021 2/22/2022 2/20/2023 2/18/2024 — 2/20/2023 2/18/2024 — 2/18/2024 — Name Michael D. Casey . . . . . Richard F. Westenberger . . . . . . Brian J. Lynch . . . . . . . . Kevin D. Corning . . . . . Michael C. Wu . . . . . . . Option Awards Number of Securities Underlying Unexercised Options (#) (Exercisable) Number of Securities Underlying Unexercised Options (#) (a) (Unexercisable) Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) 11,065 125,000 100,000 80,000 60,000 35,000 12,500 — — 6,500 9,000 4,000 2,000 — — 6,000 20,000 13,000 9,000 4,000 4,500 — — 5,000 — — — — — — — — 20,000 35,000 37,500 30,000 — — 3,000 4,000 6,000 3,800 — — — — 3,000 4,000 13,500 7,500 — 15,000 3,800 — 4,600 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 32 46496_10k.pdf Page 158 (a) Unexercisable options relate to the awards listed in the table below. These time-based stock options vest in four equal, annual installments following the date of the grant. Name Grant Date Time-Based Stock Options Granted Black-Scholes Fair Value Option Exercise Price Michael D. Casey . . . . . . . . . . . . . . . . . . . Richard F. Westenberger . . . . . . . . . . . . . . Brian J. Lynch . . . . . . . . . . . . . . . . . . . . . . Kevin D. Corning . . . . . . . . . . . . . . . . . . . 2/24/2011 2/22/2012 2/20/2013 2/18/2014 2/24/2011 2/22/2012 2/20/2013 2/18/2014 2/24/2011 2/22/2012 2/20/2013 2/18/2014 2/20/2013 2/18/2014 80,000 70,000 50,000 30,000 12,000 8,000 8,000 3,800 12,000 8,000 18,000 7,500 20,000 3,800 Michael C. Wu . . . . . . . . . . . . . . . . . . . . . 2/18/2014 4,600 $12.00 $15.27 $20.09 $19.80 $12.00 $15.27 $20.09 $19.80 $12.00 $15.27 $20.09 $19.80 $20.09 $19.80 $19.80 $28.44 $42.61 $59.27 $68.49 $28.44 $42.61 $59.27 $68.49 $28.44 $42.61 $59.27 $68.49 $59.27 $68.49 $68.49 (b) Equity Incentive Plan awards relate to the following grants: The time-based restricted stock awards vest in four equal, annual installments following the date of the grant. Vesting of the performance-based stock awards granted in fiscal 2011 and 2012 occurred on February 26, 2015. Vesting of the performance-based stock awards granted in fiscal 2013 and 2014 is contingent upon meeting specific performance targets through fiscal 2015 and 2016, respectively. For Mr. Casey, once vested, the performance-based restricted shares granted to him after 2011 may not be sold for an additional one-year period (except to satisfy tax obligations resulting from vesting of such shares). Name Grant Date Time-Based Restricted Shares Performance- Based Restricted Shares Grant Date Fair Value per Share Michael D. Casey . . . . . . . . . . . . . . . . . . Richard F. Westenberger . . . . . . . . . . . . . Brian J. Lynch . . . . . . . . . . . . . . . . . . . . . Kevin D. Corning . . . . . . . . . . . . . . . . . . 2/24/2011 3/30/2011 2/22/2012 2/20/2013 2/18/2014 2/24/2011 2/22/2012 2/20/2013 2/18/2014 2/24/2011 2/22/2012 2/20/2013 2/18/2014 2/20/2013 2/18/2014 Michael C. Wu . . . . . . . . . . . . . . . . . . . . . 2/18/2014 40,000 — 35,000 25,000 15,000 16,000 4,000 4,000 1,900 21,000 4,000 9,000 3,750 10,000 1,900 2,000 — 80,000 100,000 50,000 30,000 — 8,000 8,000 3,800 — 8,000 18,000 7,500 8,000 3,800 2,500 $28.44 $28.39 $42.61 $59.27 $68.49 $28.44 $42.61 $59.27 $68.49 $28.44 $42.61 $59.27 $68.49 $59.27 $68.49 $68.49 P r o x y (c) Amount based on the closing market price per share of the Company’s common stock as traded on the NYSE on January 2, 2015 of $86.00. 33 46496_10k.pdf Page 159 OPTION EXERCISES AND STOCK VESTED IN FISCAL 2014 The following table provides information concerning our NEOs’ exercises of stock options and vesting of restricted stock during fiscal 2014. The table reports, on an aggregate basis, the number of securities acquired upon exercise of stock options, the dollar value realized upon exercise of stock options, the number of shares of restricted stock that have vested, and the dollar value realized upon the vesting of restricted stock. Option Awards Stock Awards Name Number of Shares Acquired on Exercise (#) Michael D. Casey . . . . . . . . . . . . . Richard F. Westenberger . . . . . . . . Brian J. Lynch . . . . . . . . . . . . . . . . Kevin D. Corning . . . . . . . . . . . . . Michael C. Wu . . . . . . . . . . . . . . . 12,935 11,900 18,800 — — Value Realized on Exercise ($) (a) $ 611,068 $ 644,138 $1,008,038 — $ — $ Number of Shares Acquired on Vesting (#) 35,000 7,000 9,500 2,500 Value Realized on Vesting ($) (b) $2,369,625 $ 474,480 $ 643,005 $ 167,075 — — $ (a) Aggregate dollar amount was calculated by multiplying the number of shares acquired by the difference between the market price of the underlying securities at the time of exercise and the exercise price of the stock options. (b) Aggregate dollar amount was calculated by multiplying the number of shares acquired on vesting by the closing market price of the Company’s common stock as traded on the NYSE on the date of vesting. NONQUALIFIED DEFERRED COMPENSATION Eligible employees, including our NEOs, may elect annually to defer a portion of their base salary and annual cash incentive compensation under The William Carter Company Deferred Compensation Plan (the “Deferred Compensation Plan”). Under this plan, participants can defer up to 75% of their salary and/or 90% of their cash bonus. At the option of the participant, these amounts may be deferred to a specific date at least two years from the last day of the year in which deferrals are credited into the participant’s account. Interest on deferred amounts is credited to the participant’s account based upon the earnings and losses of one or more of the investments selected by the participant from the various investment alternatives available under the Deferred Compensation Plan. At the time of deferral, a participant must indicate whether he or she wishes to receive the amount deferred in either a lump sum or in substantially equal annual installments over a period of up to five years for “Specified Date” accounts or up to ten years for “Retirement” accounts. If a participant who is an employee of the Company separates from service prior to the elected commencement date for distributions and has not attained age 62 or age 55 and completed ten years of service, then the deferred amounts will be distributed as a lump sum, regardless of the method of distribution originally elected by the participant. If the participant in question has attained age 62 or age 55 with ten years of service and has previously elected to do so on a timely basis, then the participant may receive the amounts in substantially equal annual installments over a period of up to ten years. There is a six-month delay in the commencement of distributions for all participants, if triggered by the participant’s termination or retirement. Changes to deferral elections with respect to previously deferred amounts are permitted only under the limited terms and conditions specified in the Internal Revenue Code and early withdrawals from deferred accounts are permitted only in extreme cases, such as unforeseen financial hardship resulting from an illness or accident of the participant which is demonstrated to the Company’s Retirement Committee. 34 46496_10k.pdf Page 160 FISCAL 2014 NONQUALIFIED DEFERRED COMPENSATION TABLE Employee Contributions (a) Company Contributions Michael D. Casey . . . . . . . . . . . . . . . . . . . . . . Richard F. Westenberger . . . . . . . . . . . . . . . . Brian J. Lynch . . . . . . . . . . . . . . . . . . . . . . . . Kevin D. Corning . . . . . . . . . . . . . . . . . . . . . . Michael C. Wu . . . . . . . . . . . . . . . . . . . . . . . . — $ $ 8,816 $ 15,014 $369,788 — $ $— $— $— $— $— Aggregate Earnings (b) $ — $ 4,431 $ 6,119 $22,967 $ — Withdrawals or Distributions $— $— $— $— $— Aggregate Balance (c) — $ $ 72,969 $ 87,011 $501,069 — $ (a) All of the amounts reported in this column for Messrs. Westenberger and Lynch are also included within the amount reported for that officer in the 2014 Summary Compensation Table. The amount reported in this column for Mr. Corning, includes $204,850 in contributions from his 2013 annual cash incentive compensation which is not included in the amounts reported for him in the 2014 Summary Compensation Table. (b) None of the amounts reported in this column are reported in the All Other Compensation column of the 2014 Summary Compensation Table because the Company does not pay guaranteed or preferential earnings on deferred compensation. (c) Amounts reported in this column for each NEO include amounts previously reported in the Company’s Summary Compensation Table in previous years when earned if that NEO’s compensation was required to be disclosed in a previous year. P r o x y 35 46496_10k.pdf Page 161 SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS, AND EXECUTIVE OFFICERS The following table sets forth the number of shares of Carter’s, Inc. common stock owned by each of the following parties as of March 26, 2015, or as of such other date as indicated: (a) each person known by Carter’s, Inc. to own beneficially more than five percent of the outstanding common stock; (b) our NEOs; (c) each director; and (d) all directors and executive officers as a group. Unless otherwise indicated below, the holders’ address is 3438 Peachtree Road, Suite 1800, Atlanta, Georgia 30326. Name of Beneficial Owner Shares Percent Hound Partners, LLC (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pennant Capital Management, LLC (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Janus Capital Management, LLC (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Blackrock, Inc. (4) The Vanguard Group, Inc. (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michael D. Casey (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brian J. Lynch (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Richard F. Westenberger (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kevin D. Corning (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michael C. Wu (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amy Woods Brinkley (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vanessa J. Castagna (6) A. Bruce Cleverly (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jevin S. Eagle (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paul Fulton (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William J. Montgoris (6) David Pulver (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . John R. Welch (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thomas E. Whiddon (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All directors and Executive Officers as a group (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,970,073 3,384,400 3,267,129 3,174,689 3,116,375 953,265 140,043 74,013 37,541 8,097 17,620 18,378 6,023 7,984 97,544 26,175 49,204 70,514 71,108 1,740,483 7.2% 6.4% 6.2% 6.0% 5.9% 1.8% * * * * * * * * * * * * * 3.3% * Indicates less than 1% of our common stock. (1) This information is based on Schedule 13G/A, filed with the SEC on February 17, 2015. Hound Partners, LLC and Jonathan Auerbach have shared voting power and dispositive power covering 3,970,073 shares of our common stock. The address for Hound Partners, LLC is 101 Park Avenue, 48th Floor, New York, NY 10178. (2) This information is based on Schedule 13G/A, filed with the SEC on February 18, 2015. Pennant Capital Management, LLC and Alan Fournier, its Managing Member, have shared voting power and dispositive power covering 3,384,400 shares of our common stock. The address for Pennant Capital Management, LLC is One DeForest Avenue, Suite 200, Summit, NJ 07901. (3) This information is based on Schedule 13G/A, filed with the SEC on February 17, 2015. Janus Capital Management, LLC has sole voting power and dispositive power covering 3,247,729 shares of our common stock. INTECH Investment Management (a direct subsidiary of Janus Capital Management, LLC) has shared voting power and dispositive power covering 19,400 shares of our common stock. The address for Janus Capital Management, LLC is 151 Detroit Street, Denver, CO 80206. (4) This information is based on Schedule 13G/A, filed with the SEC on January 30, 2015. BlackRock, Inc. has sole voting power covering 3,000,293 shares and dispositive power covering 3,174,689 shares of our common stock. The address for BlackRock, Inc. is 40 East 52nd Street, New York, NY 10022. (5) This information is based on Schedule 13G/A, filed with the SEC on February 10, 2015. The Vanguard Group, Inc. has sole voting power covering 35,289 shares and sole dispositive power covering 3,084,846 shares of our common stock. The Vanguard Group, Inc. has shared dispositive power covering 301,579 shares of our common stock. The address for The Vanguard Group, Inc. is 100 Vanguard Boulevard, Malvern, PA 19355. 36 46496_10k.pdf Page 162 (6) This amount includes a) number of shares subject to exercisable stock options, including stock options that will become exercisable during the 60 days after March 26, 2015, and b) number of shares of restricted common stock. See the detail for each NEO below: Name Exercisable Stock Options Restricted Common Stock Michael D. Casey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Richard F. Westenberger . . . . . . . . . . . . . . . . . . . . . . . . . Brian J. Lynch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kevin D. Corning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michael C. Wu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NEOs and all other Executive Officers as a Group . . . . . 481,065 29,450 67,875 10,950 1,150 668,390 234,500 21,325 44,312 23,325 6,640 372,412 Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company’s executive officers and directors, and persons who beneficially own more than ten percent (10%) of the Company’s common stock, file initial reports of ownership and changes in ownership with the SEC and the NYSE. Based on a review of the copies of such forms furnished to the Company, the Company believes that all forms were filed in a timely manner during fiscal 2014. P r o x y 37 46496_10k.pdf Page 163 PROPOSAL NUMBER TWO ADVISORY VOTE ON APPROVAL OF EXECUTIVE COMPENSATION The Compensation Discussion and Analysis section of this proxy statement beginning on page 18 describes the Company’s executive compensation program and the compensation decisions that the Compensation Committee and Board of Directors made in 2014 with respect to the compensation of the Company’s NEOs. The Company is committed to achieving long-term, sustainable growth and increasing shareholder value. The Company’s compensation program for its NEOs is designed to support these objectives and encourage strong financial performance on an annual and long-term basis by linking a significant portion of the NEOs’ total direct compensation to Company performance in the form of incentive compensation. The Board of Directors is asking shareholders to cast a non-binding, advisory vote FOR the following resolution: “RESOLVED, that the compensation paid to the Company’s NEOs, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.” This proposal is commonly referred to as the “say-on-pay” vote. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our NEOs and the policies and practices described in this proxy statement. Although the vote we are asking you to cast is non-binding, the Compensation Committee and the Board value the views of our shareholders and intend to consider the outcome of the vote when determining future compensation arrangements for our NEOs. The Board recommends a vote FOR the approval of compensation of the Company’s NEOs as disclosed in this proxy statement. Vote Required Because this Proposal Number Two asks for a non-binding, advisory vote, there is no required vote that would constitute approval. We value the opinions expressed by our shareholders in this advisory vote, and our Compensation Committee will consider the outcome of the vote when designing our compensation programs and making future compensation decisions for our NEOs. Abstentions and broker non-votes, if any, will not have any impact on this advisory vote. TRANSACTIONS WITH RELATED PERSONS, PROMOTERS, AND CERTAIN CONTROL PERSONS The Company has a written policy that requires all transactions with related persons be reviewed by our Chief Financial Officer, and all such transactions involving more than $10,000 be reviewed by our Chief Financial Officer with our Audit Committee and approved by our Audit Committee. Our Chief Financial Officer annually reviews all transactions with related persons with our Audit Committee. There were no such transactions during fiscal 2014. 38 46496_10k.pdf Page 164 AUDIT COMMITTEE REPORT The Audit Committee reviews the Company’s accounting, auditing, and financial reporting process on behalf of the Board. The Audit Committee’s charter is available in the Investor Relations section of our website at www.carters.com. Management has the primary responsibility for establishing and maintaining adequate internal financial controls, for preparing the financial statements, and for the public reporting process. PricewaterhouseCoopers (“PwC”), the Company’s independent registered public accounting firm, is responsible for expressing opinions on the conformity of the Company’s audited consolidated financial statements with accounting principles generally accepted in the United States of America and on the effectiveness of the Company’s internal control over financial reporting. The Audit Committee has reviewed and discussed with management and PwC the audited consolidated financial statements for the fiscal year ended January 3, 2015 and PwC’s evaluation of the effectiveness of the Company’s internal control over financial reporting. The Audit Committee has discussed with PwC the matters that are required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. The Audit Committee has received the written disclosures and the letter from PwC required by applicable requirements of the Public Company Accounting Oversight Board regarding PwC’s communications with the Audit Committee concerning independence, and has discussed with PwC the firm’s independence. Based on the review and discussions referred to above, the Audit Committee recommended to our Board of Directors that the audited consolidated financial statements for the fiscal year ended January 3, 2015 be included in our Annual Report on Form 10-K for fiscal 2014 for filing with the SEC. Submitted by the Audit Committee Mr. David Pulver, Chairman Ms. Amy Woods Brinkley Mr. William J. Montgoris Mr. Thomas E. Whiddon The Audit Committee Report does not constitute soliciting material, and shall not be deemed to be filed or incorporated by reference into any other filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate the Audit Committee Report by reference therein. P r o x y 39 46496_10k.pdf Page 165 PROPOSAL NUMBER THREE RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Audit Committee of the Board of Directors has appointed PwC to serve as the Company’s independent registered public accounting firm for fiscal 2015, and the Board recommends that shareholders ratify this appointment. The Board is submitting the appointment of PwC as the Company’s independent registered public accounting firm for shareholder ratification. The Board recommends that shareholders ratify this appointment at the Annual Meeting. Shareholder ratification of the appointment of PwC is not required by law or otherwise. The Board is submitting this matter to shareholders for ratification because the Board believes it to be a good corporate practice. If the shareholders do not ratify the appointment, the Audit Committee may reconsider whether or not to retain PwC. Even if the appointment is ratified, the Audit Committee may appoint a different independent registered public accounting firm at any time during the year if, in its discretion, it determines that such a change would be in the Company’s best interest and that of the Company’s shareholders. A representative of PwC is expected to attend the Annual Meeting, and he or she will have the opportunity to make a statement and be available to respond to appropriate questions. For additional information regarding the Company’s relationship with PwC, please refer to the Audit Committee Report above. The Audit Committee has also adopted policies and procedures for pre-approving all non-audit work performed by PwC. The Audit Committee has pre-approved the use of PwC for specific types of services that fall within categories of non-audit services, including various tax services. The Audit Committee receives regular updates as to the fees associated with the services that are subject to pre-approval. Services that do not fall within a pre-approved category require specific consideration and pre-approval by the Audit Committee. All services rendered by PwC in the table below were pre-approved by the Audit Committee. The aggregate fees that the Company incurred for professional services rendered by PwC for fiscal years 2014 and 2013 were as follows: Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit-Related Fees . . . . . . . . . . . . . . . . . . . . Tax Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . $ 2014 1,626,000 130,000 — 3,600 $ 2013 1,995,000 — — 3,640 Total Fees . . . . . . . . . . . . . . . . . . . . . . . $ 1,759,600 $ 1,998,640 • • • Audit Fees for fiscal years 2014 and 2013 were for professional services rendered for the integrated audit of the consolidated financial statements and internal control over financial reporting of the Company, other auditing procedures related to the adoption of new accounting pronouncements, review of other significant transactions, and related out-of-pocket expenses. Audit-Related Fees for fiscal 2014 were for professional services to assess the Company’s controls related to compliance with anti-corruption laws and regulations. All Other Fees for fiscal years 2014 and 2013 consisted of software license fees. The Board recommends a vote FOR the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for fiscal 2015. Vote Required The approval of Proposal Number Three requires the affirmative vote of a majority of the votes properly cast at our Annual Meeting. Abstentions will not affect the outcome of this proposal. A broker or other nominee will generally have discretionary authority to vote on this proposal because it is considered a routine matter, and, therefore, we do not expect broker non-votes with respect to this proposal. 40 46496_10k.pdf Page 166 OTHER MATTERS As of the date of this proxy statement, we know of no business that will be presented for consideration at the Annual Meeting, other than the items referred to above. If any other matter is properly brought before the Annual Meeting for action by shareholders, proxies in the enclosed form returned to the Company will be voted in accordance with the recommendation of the Board or, in the absence of such a recommendation, in accordance with the judgment of the proxy holder. P r o x y 41 46496_10k.pdf Page 167 [THIS PAGE INTENTIONALLY LEFT BLANK] 46496_10k.pdf Page 168 APPENDIX A 2014 RETAIL SURVEY PARTICIPANT LIST (“RETAIL SURVEY”) Abercrombie & Fitch Co. Academy Sports + Outdoors Aeropostale, Inc. American Eagle Outfitters, Inc. Ann Inc. Ascena Retail Group, Inc. Bebe Stores, Inc. Belk, Inc. Body Central Corp The Bon-Ton Stores, Inc. Coach, Inc. Charlotte Russe, Inc. Charming Shoppes, Inc. Chico’s FAS, Inc. The Children’s Place, Inc. Deckers Outdoor Corporation Destination Maternity Corporation Dick’s Sporting Goods, Inc. DSW Inc. Express, Inc. The Finish Line, Inc. Foot Locker, Inc. Fossil Group, Inc. The Gap, Inc. Hot Topic, Inc. Hudson’s Bay Company Intermix, LLC J. C. Penney Corporation, Inc. J. Crew Group, Inc. Kate Spade & Company Kenneth Cole Productions, Inc. Kohl’s Corporation L Brands, Inc. Lands’ End, Inc. L.L. Bean, Inc. lululemon athletica, inc. Macy’s, Inc. Matilda Jane Clothing The Neiman Marcus Group, Inc. New York & Company, Inc. Nordstrom, Inc. Payless Holdings Perry Ellis International, Inc. Phillips-Van Heusen Corporation Polo Ralph Lauren Corporation QVC, Inc. Ross Stores, Inc. Sears Holdings Corporation Stage Stores, Inc. The Talbots, Inc. The TJX Companies, Inc. Vera Bradley, Inc. P r o x y A-1 46496_10k.pdf Page 169 [THIS PAGE INTENTIONALLY LEFT BLANK] 46496_10k.pdf Page 170 [THIS PAGE INTENTIONALLY LEFT BLANK] 46496_10k.pdf Page 171 [THIS PAGE INTENTIONALLY LEFT BLANK] 46496_10k.pdf Page 172 This page intentionally left blank. 46496_Txt.indd 7 46496_Txt.indd 7 3/31/15 2:24 PM 3/31/15 2:24 PM Annual Meeting The 2015 Annual Meeting of Shareholders will be held at 8:00 a.m. on May 7, 2015. The meeting will be held at our offi ces located at: 3438 Peachtree Road NE 2nd Floor Atlanta, Georgia 30326 Common Stock Symbol: CRI Exchange: New York Stock Exchange Transfer Agent American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, New York 11219 (800) 937-5449 www.amstock.com Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP 1075 Peachtree Street, Suite 2600 Atlanta, Georgia 30309 Legal Counsel Paul Hastings LLP 1170 Peachtree Street, N.E. Suite 100 Atlanta, Georgia 30309 Investor Relations For further information on Carter’s, Inc., or for additional copies of this Annual Report, Proxy Statement, Form 10-K, or other ﬁ nancial information, please visit the investor relations section of the Company’s website at www.carters.com. You may also contact Carter’s Investor Relations at investor@carters.com or (678) 791-7615. © 2015 Carter’s, Inc. All rights reserved. Carter’s, Count on Carter’s, Little Layette, Little Collections, Just One You, Precious Firsts, Child of Mine, OshKosh B’gosh, OshKosh, and Genuine Kids are trademarks owned by subsidiaries of Carter’s, Inc. All market share data provided in this Annual Report is based on information provided by NPD Group, Inc. as of February 26, 2015. References to speciﬁ c market share are expressed as a percentage of total retail sales of a particular market. 46496_Txt.indd 8 46496_Txt.indd 8 3/30/15 10:44 PM 3/30/15 10:44 PM Leadership Team Board of Directors Michael D. Casey Chairman of the Board of Directors & Chief Executive Offi cer Brian J. Lynch President Amy Woods Brinkley 1 Former Chief Risk Offi cer & Former President Consumer Products Division, Bank of America Corporation Kevin D. Corning Executive Vice President, International Michael D. Casey Chairman of the Board of Directors & Chief Executive Offi cer Julie A. D’Emilio Senior Vice President of Sales William G. Foglesong Senior Vice President of Marketing Richard F. Westenberger Executive Vice President & Chief Financial Offi cer Jeff rey B. Williams Senior Vice President of Retail Jill A. Wilson Senior Vice President of Human Resources & Talent Development Michael C. Wu Senior Vice President, General Counsel & Secretary Vanessa J. Castagna 3 Former Executive Chairwoman, Mervyns, LLC Former Chairwoman & Chief Executive Offi cer, JCPenney Stores, Catalog & Internet for J. C. Penney Company, Inc. A. Bruce Cleverly 2,3 Former President, Global Oral Care Division, The Procter & Gamble Company Jevin S. Eagle 2 Former Chief Executive Offi cer, DavidsTea Inc. Former Executive Vice President, Merchandising and Marketing, Staples, Inc. Paul Fulton 2 (Chair) Non-Executive Chairman, Bassett Furniture Industries, Inc. Former President, Sara Lee Corporation William J. Montgoris 1 Former Chief Operating Offi cer & Former Chief Financial Offi cer, The Bear Stearns Companies, Inc. David Pulver 1 (Chair) President, Cornerstone Capital, Inc. Former Chairman & Co-Chief Executive Offi cer, The Children’s Place, Inc. John R. Welch 2,3 (Chair) Former President, Mast Industries (Far East) Ltd. Thomas E. Whiddon* 1,3 Former Executive Vice President- Logistics & Technology and Former Chief Financial Offi cer, Lowe’s Companies, Inc. *Lead Independent Director Board Committees: 1 Audit 2 Compensation 3 Nominating and Corporate Governance 46496_Txt.indd 9 46496_Txt.indd 9 3/30/15 10:44 PM 3/30/15 10:44 PM Welcome 46496_Txt.indd 10 46496_Txt.indd 10 3/30/15 10:45 PM 3/30/15 10:45 PM C a r t e r ’ s , I n c . 2 0 1 2 A n n u a l R e p o r t Welcome a new generation. Carter’s, Inc. | 1170 Peachtree Street NE, Suite 900 | Atlanta, Georgia 30309 | 404-745-2700 carters.com | oshkoshbgosh.com 46496_Cov.indd 2 46496_Cov.indd 2 3/30/15 12:27 PM 3/30/15 12:27 PM Carter’s, Inc. 3438 Peachtree Road NE, Suite 1800 Atlanta, GA 30326 | 678.791.1000 carters.com | oshkoshbgosh.com C a r t e r ’ s , I n c . 2 0 1 4 A n n u a l R e p o r t Carter’s, Inc. 2014 Annual Report 46496_Cov.indd 1 46496_Cov.indd 1 3/30/15 12:27 PM 3/30/15 12:27 PM

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