Carter's (CRI) 10-Q2023 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the transition period from __________to __________

Commission file number: 001-31829

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NOTE 1 – THE COMPANY

NOTE 2 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). All intercompany transactions and balances have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, comprehensive income, statement of shareholders’ equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter ended July 1, 2023 are not necessarily indicative of the results that may be expected for the current fiscal year ending December 30, 2023.

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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 periods. Actual results could differ from those estimates.

The accompanying condensed consolidated balance sheet as of December 31, 2022 was derived from the Company’s audited consolidated financial statements included in its most recently filed Annual Report on Form 10-K. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q.

We have recast the consolidated statement of operations for the fiscal quarter and two fiscal quarters ended July 2, 2022 to conform to our current presentation of combining Adverse purchase commitments within Cost of goods sold.

Inventories

Our 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 net realizable value. Inventories at July 1, 2023 were $681.6 million compared to $858.3 million at July 2, 2022 and $744.6 million at December 31, 2022. The decrease of $176.7 million, or 20.6%, at July 1, 2023 compared to July 2, 2022 is primarily due to decreased in-transit inventory and lower forecasted net sales for fiscal 2023, partially offset by increased product costs. Due to the seasonal nature of our operations, the inventories balance at July 1, 2023 is not comparable to the inventories balance at December 31, 2022.

Adjustments to bring inventory to net realizable value as a result of obsolete, damaged, and excess inventory at July 1, 2023 were consistent to those at July 2, 2022. These adjustments as a percentage of gross inventory have remained relatively stable due to the overall quality and planned use of the inventory. The liability for adverse inventory and fabric purchase commitments decreased from $5.2 million as of July 2, 2022 to $2.9 million as of July 1, 2023, primarily due to the consumption of previously reserved fabric.

Supply Chain Financing Program

We facilitate a voluntary supply chain finance (“SCF”) program through participating financial institutions. This SCF program enables our suppliers to sell their receivables due from the Company to participating financial institutions at their discretion. As of July 1, 2023, the SCF program has a $70.0 million revolving capacity. We are not a party to the agreements between the participating financial institutions and the suppliers in connection with the SCF program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the SCF program. No guarantees are provided by the Company or any of our subsidiaries under the SCF program.

The amounts payable to the participating financial institution for suppliers who voluntarily participate in the SCF program are included in Accounts payable on our condensed consolidated statement balance sheets. Amounts under the SCF program included in Account payable were $23.0 million, $16.5 million, and $23.5 million as of July 1, 2023, December 31, 2022, and July 2, 2022, respectively. Payments made under the SCF program, like payments of other accounts payable, are a reduction to our operating cash flow.

Accounting Policies

The accounting policies the Company follows are set forth in its most recently filed Annual Report on Form 10-K. There have been no material changes to these accounting policies. New accounting pronouncements adopted at the beginning of fiscal 2023 are noted below.

Recent Accounting Pronouncements

Supplier Finance Programs (ASU 2022-04)

NOTE 3 - REVENUE RECOGNITION

The Company’s revenues are earned from contracts or arrangements with retail and wholesale customers and licensees. Contracts include written agreements, as well as arrangements that are implied by customary practices or law.

Disaggregation of Revenue

The Company sells its products directly to consumers (“direct-to-consumer”) and to other retail companies and partners that subsequently sell the products directly to their own retail customers (“wholesale channel”). The Company also earns royalties from certain of its licensees. Disaggregated revenues from these sources for the fiscal periods indicated were as follows:

Accounts Receivable from Customers and Licensees

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

Contract Assets and Liabilities

The Company’s contract assets are not material.

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

NOTE 4 – ACCUMULATED OTHER COMPREHENSIVE LOSS

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

During the first two quarters of both fiscal 2023 and fiscal 2022, no amounts were reclassified from Accumulated other comprehensive loss to the consolidated statement of operations.

NOTE 5 – COMMON STOCK

Open Market Share Repurchases

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

The total aggregate remaining capacity under outstanding repurchase authorizations as of July 1, 2023 was approximately $709.6 million, based on settled repurchase transactions. The share repurchase authorizations have no expiration date.

Future repurchases may occur from time to time in the open market, in privately negotiated transactions, or otherwise. The timing and amount of any repurchases will be at the discretion of the Company subject to restrictions under the Company’s secured revolving credit facility, market conditions, stock price, other investment priorities, and other factors.

Dividends

In each of the first two quarters of fiscal 2023, the Board of Directors declared, and the Company paid, a cash dividend per common share of $0.75 (for an aggregate cash dividend per common share of $1.50 for the first two quarters of fiscal 2023). Additionally, in each of the first two quarters of fiscal 2022, the Board of Directors declared, and the Company paid, a cash dividend per common share of $0.75 (for an aggregate cash dividend per common share of $1.50 for the first two quarters of fiscal 2022). The Board of Directors will evaluate future dividend declarations based on a number of factors, including restrictions under the Company’s secured revolving credit facility, business conditions, the Company’s financial performance, and other considerations.

NOTE 6 – LONG-TERM DEBT

Long-term debt consisted of the following:

Secured Revolving Credit Facility

As of July 1, 2023, the Company had no outstanding borrowings under its secured revolving credit facility, exclusive of $4.4 million of outstanding letters of credit. As of July 1, 2023, there was approximately $845.6 million available for future borrowing. All outstanding borrowings under the Company’s secured revolving credit facility are classified as non-current liabilities on the Company’s condensed consolidated balance sheets because of the contractual repayment terms under the credit facility.

The Company’s secured revolving credit facility provides for an aggregate credit line of $850 million which includes a $750 million U.S. dollar facility and a $100 million multicurrency facility. The credit facility matures in April 2027. The facility contains covenants that restrict the Company’s ability to, among other things: (i) create or incur liens, debt, guarantees or other investments, (ii) engage in mergers and consolidations, (iii) pay dividends or other distributions to, and redemptions and repurchases from, equity holders, (iv) prepay, redeem or repurchase subordinated or junior debt, (v) amend organizational documents, and (vi) engage in certain transactions with affiliates.

As of July 1, 2023, the interest rate margins applicable to the secured revolving credit facility were 1.125% for adjusted term Secured Overnight Financing Rate (“SOFR”) loans and 0.125% for base rate loans. As of July 1, 2023, the applicable borrowing rate for the secured revolving credit facility was approximately 6.37%, consisting of an adjusted term SOFR rate plus the applicable margin. As of July 1, 2023, the Company was in compliance with its financial and other covenants under the secured revolving credit facility.

NOTE 7 – STOCK-BASED COMPENSATION

The Company recorded stock-based compensation expense as follows:

The Company recognizes compensation cost ratably over the applicable performance periods based on the estimated probability of achievement of its performance targets at the end of each period. During the first quarter of fiscal 2023, the achievement of performance target estimates related to certain performance-based grants were revised resulting in a reversal of $0.4 million of previously recognized stock compensation expense.

NOTE 8 – INCOME TAXES

As of July 1, 2023, the Company had gross unrecognized income tax benefits of approximately $8.9 million, of which $6.3 million, if ultimately recognized, may affect the Company’s effective income tax rate in the periods settled. The Company has recorded tax positions for which the ultimate deductibility is more likely than not, but for which there is uncertainty about the timing of such deductions.

Included in the reserves for unrecognized tax benefits at July 1, 2023 is approximately $2.4 million of reserves for which the statute of limitations is expected to expire within the next 12 months. If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective income tax rate for fiscal 2023 along with the effective income tax rate in the quarter in which the benefits are recognized.

The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and recognizes penalties related to unrecognized income tax benefits as a component of income tax expense. Interest expense recorded on uncertain tax positions was not material for the second quarter and first two quarters of fiscal 2023 and fiscal 2022. The Company had approximately $1.6 million, $1.5 million, and $2.1 million of interest accrued on uncertain tax positions as of July 1, 2023, December 31, 2022, and July 2, 2022, respectively.

NOTE 9 – FAIR VALUE MEASUREMENTS

Investments

The Company invests in marketable securities, principally equity-based mutual funds, to mitigate the risk associated with the investment return on employee deferrals of compensation. All of the marketable securities are included in Other assets on the accompanying condensed consolidated balance sheets, and their aggregate fair values were approximately $15.7 million, $15.1 million, and $15.7 million at July 1, 2023, December 31, 2022, and July 2, 2022, respectively. These investments are classified as Level 1 within the fair value hierarchy. The change in the aggregate fair values of marketable securities is due to the net activity of gains and losses and any contributions and distributions during the period. Gains on the investments in marketable securities were $0.2 million and $0.6 million for the second quarter and the first two quarters of fiscal 2023, respectively. Losses on the investments in marketable securities were $0.9 million and $1.9 million for the second quarter and the first two quarters of fiscal 2022, respectively. These amounts are included in Other (income) expense, net on the Company’s condensed consolidated statement of operations.

Borrowings

As of July 1, 2023, the Company had no outstanding borrowings under its secured revolving credit facility.

Goodwill, Intangible, and Long-Lived Tangible Assets

Some assets are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances. These assets can include goodwill, indefinite-lived intangible assets, and long-lived tangible assets that have been reduced to fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.

NOTE 10 – EARNINGS PER SHARE

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

NOTE 11 – OTHER CURRENT LIABILITIES

Other current liabilities at the end of any comparable period, were as follows:

NOTE 12 – COMMITMENTS AND CONTINGENCIES

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

The Company’s contractual obligations and commitments include obligations associated with leases, the secured revolving credit agreement, senior notes, and employee benefit plans.

NOTE 13 – SEGMENT INFORMATION

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

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q that are not historical fact and use predictive words such as “estimates”, “outlook”, “guidance”, “expect”, “believe”, “intend”, “designed”, “target”, “plans”, “may”, “will”, “are confident” and similar words are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements and related assumptions involve risks and uncertainties that could cause actual results and outcomes to differ materially from any forward-looking statements or views expressed in this Form 10-Q. These risks and uncertainties include, but are not limited to, the factors disclosed in Part I, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and otherwise in our reports and filings with the Securities and Exchange Commission, as well as the following factors: the continuing effects of the novel coronavirus (COVID-19) pandemic; macroeconomic factors, including inflationary pressures; the impact of supply chain delays; financial difficulties for one or more of our major customers; an overall decrease in consumer spending, including, but not limited to, decreases in consumer spending caused by declining birth rates; our products not being accepted in the marketplace; increased competition in the market place; diminished value of our brands; the failure to protect our intellectual property; the failure to comply with applicable quality standards or regulations; unseasonable or extreme weather conditions; pending and threatened lawsuits; a breach of our information technology systems and the loss of personal data; increased margin pressures, including increased cost of materials and labor; and our inability to successfully increase prices to offset those increased costs; our foreign sourcing arrangements; disruptions in our supply chain, including increased transportation and freight costs; the management and expansion of our business domestically and internationally; the acquisition and integration of other brands and businesses; changes in our tax obligations, including additional customs, duties or tariffs; our ability to achieve our forecasted financial results for the fiscal year; our continued ability to declare and pay a dividend and conduct share repurchases in future periods; our planned opening and closing of stores during the fiscal year; and other risks detailed in the Company’s periodic reports as filed in accordance with the Securities Exchange Act of 1934, as amended. The Company does not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.

OVERVIEW

Our mission is to serve the needs of all families with young children, with a vision to be the world’s favorite brands in young children’s apparel and related products. We believe our brands are complementary to one another in product offering and aesthetic. Each brand is uniquely positioned in the marketplace and offers great value to families with young children. Our multi-channel, global business model, which includes retail stores, eCommerce, and wholesale distribution capabilities, as well as omni-channel capabilities in the United States and Canada, enables us to reach a broad range of consumers around the world. As of July 1, 2023, our channels included approximately 1,000 company-owned retail stores, approximately 19,350 wholesale locations, and eCommerce sites in North America, as well as our international wholesale accounts and licensees which operate in over 90 countries.

The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Form 10-Q and audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the 2022 fiscal year ended December 31, 2022.

Segments

Our three business segments are: U.S. Retail, U.S. Wholesale, and International. These segments are our operating and reporting segments. Our U.S. Retail segment consists of revenue primarily from sales of products in the United States through our retail stores and eCommerce websites. Similarly, our U.S. Wholesale segment consists of revenue primarily from sales in the United States of products to our wholesale partners. Our International segment consists of revenue primarily from sales of products outside the United States, largely through our retail stores and eCommerce websites in Canada and Mexico, and sales to our international wholesale customers and licensees.

Gross Profit and Gross Margin

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

Recent Developments

Macroeconomic factors, including inflationary pressures, increased interest rates, the lapping of government stimulus, increased credit card debt, decreased savings rates, and increased risks of a recession continued to create a complex and challenging environment for our business in the second quarter of fiscal 2023. We believe these macroeconomic factors have resulted in lower consumer sentiment and negatively impacted demand for our products and will likely continue to negatively impact demand in the remainder of fiscal 2023.

Compared to the end of the second quarter of fiscal 2022, our inventories decreased $176.7 million, or 20.6%, to $681.6 million, primarily due to decreased in-transit inventory and lower forecasted net sales for fiscal 2023, partially offset by increased product costs. Inventory held to be sold in future periods, or “pack and hold” inventory, decreased during the second quarter of fiscal 2023 but remained relatively consistent to the levels at the end of the second quarter of fiscal 2022. Inventory levels are elevated throughout much of the retail industry, resulting in an increase in promotional activity as companies sell off their excess inventories. We have taken action to align inventory with planned demand, including selectively utilizing a pack and hold strategy to sell through inventory profitably in later periods, and selling through excess inventory in our own retail channels and in off-price channels. As a result, inventory levels during fiscal 2023 are expected to be lower than those in fiscal 2022.

In fiscal 2022, the cost of transportation, particularly ocean freight rates, raw materials, packaging materials, labor, energy, fuel, and other inputs necessary for the production and distribution of our products rapidly increased. We continued to experience inflationary pressures on input costs through the end of the second quarter of fiscal 2023, and we may continue to experience these pressures for the remainder of fiscal 2023. We have offset some of these cost pressures through increases in the selling prices of some of our products, product cost optimization, increasing and diversifying our portfolio of suppliers, leveraging a mix of longer-term shipping container contracts and spot market purchases, and reductions in discretionary spending. However, our pricing actions could have an adverse impact on demand and may not be sufficient to cover all increased costs that we may experience.

During the first quarter of fiscal 2023, we initiated several organizational restructuring initiatives which included a reorganization of staffing models across multiple functions to drive labor savings and increase efficiencies. In conjunction with these plans, we incurred approximately $0.4 million and $3.3 million in costs in the second quarter and the first two quarters of

fiscal 2023, respectively. These costs primarily related to severance and other termination benefits expected to be paid out by the end of the year and are included in Other current liabilities in the accompanying unaudited condensed consolidated balance sheet.

Additionally, we executed an amendment to the lease of our corporate headquarters in Atlanta, Georgia which resulted in returning three floors to the landlord and extending the lease to 2035. As a result of the reduction in leased office space, we recorded a net gain of $1.8 million related to the partial termination of the lease in the first quarter of fiscal 2023.

Second Fiscal Quarter 2023 Financial Highlights

Our sales and gross profit in the second quarter of fiscal 2023 declined compared to the second quarter of fiscal 2022. We believe this reflects the significant ongoing and negative impact of high inflation on consumer demand for our products and reduced spending more broadly around the retail industry. Demand from our wholesale customers was lower in the second quarter of fiscal 2023 reflecting the same pressure on consumer demand in their own businesses and a more cautious approach regarding inventory commitments.

High inflation also continued to negatively weigh on aspects of our cost structure in the second quarter of fiscal 2023. Despite these challenges, we were able to increase our average selling prices per unit low-single digits, manage our variable expenses, increase our store count, reduce debt, and return capital to our shareholders.

Unless otherwise stated, comparisons are to the second quarter of fiscal 2022:

RESULTS OF OPERATIONS

SECOND FISCAL QUARTER ENDED JULY 1, 2023 COMPARED TO SECOND FISCAL QUARTER ENDED JULY 2, 2022

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

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

Net Sales

Consolidated net sales decreased $100.5 million, or 14.3%, to $600.2 million. This decrease in net sales was primarily driven by macroeconomic factors, including inflationary pressures, increased interest rates, and risk of recession, driving lower consumer demand. These decreases were partially offset by increased average selling prices per unit due to improved price realization. Average selling prices per unit increased low-single digits and units sold decreased in the high-teens. Changes in foreign currency exchange rates used for translation had an unfavorable effect on our consolidated net sales of approximately $1.2 million.

Gross Profit and Gross Margin

Our consolidated gross profit decreased $39.3 million, or 11.9%, to $291.9 million and consolidated gross margin increased 130 bps to 48.6%. The decrease in consolidated gross profit was primarily driven by decreased net sales. The increase in gross margin was primarily driven by decreased fabric purchases commitment charges and inventory provisions and increased average selling prices per unit mentioned above. These factors were partially offset by increased average cost per unit sold and changes in customer and channel mix. Average cost per unit sold increased mid-single digits, reflecting increases to product input costs partially offset by decreased ocean freight rates. We expect inbound transportation rates, including ocean freight rates, to decrease in the second half of fiscal 2023 and into fiscal 2024.

Selling, General, and Administrative Expenses

Consolidated SG&A expenses decreased $2.7 million, or 1.1%, to $258.7 million and increased as a percentage of consolidated net sales by approximately 580 bps to 43.1%. This increase in SG&A rate was primarily driven by fixed cost deleverage on decreased sales, increased consulting and professional fees, and increased performance-based compensation expense.

Consolidated interest expense decreased $0.6 million, or 6.6%, to $8.1 million. Weighted-average borrowings for the second quarter of fiscal 2023 were $521.5 million at an effective interest rate of 6.20%, compared to weighted-average borrowings for the second quarter of fiscal 2022 of $567.3 million at an effective interest rate of 5.99%.

The decrease in weighted-average borrowings was attributable to decreased borrowings under our secured revolving credit facility for the period. The increase in the effective interest rate was primarily due to increased interest rates on our secured revolving credit facility, reflecting the broader rise in market interest rates.

Loss on Extinguishment of Debt

During the second quarter of fiscal 2022, loss on extinguishment of debt was $19.9 million due to the early extinguishment of our $500 million in aggregate principal amount of 5.500% senior notes due May 2025.

Income Taxes

Our consolidated income tax provision decreased $2.7 million, or 27.0%, to $7.4 million and the effective tax rate increased 210 bps to 23.6%. The increased effective tax rate primarily relates to a higher proportion of income generated in the United States, which is a higher tax jurisdiction relative to our international operations.

Net Income

Results by Segment - Second Quarter of Fiscal 2023 compared to Second Quarter of Fiscal 2022

The following table summarizes net sales and operating income, by segment, for the second quarter of fiscal 2023 and the second quarter of fiscal 2022:

Comparable Sales Metrics

We present comparable sales metrics because we consider them an important supplemental measure of our U.S. Retail and International performance, and the Company uses such information to assess the performance of the U.S. Retail and International segments. Additionally, we believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of our business.

Our comparable sales metrics include sales for all stores and eCommerce sites that were open and operated by us during the comparable fiscal period, including stand-alone format stores that converted to multi-branded format stores and certain remodeled or relocated stores. A store or site becomes comparable following 13 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 more than five miles away, or there is a material change in square footage, such store is treated as a new store. Stores that are closed during the relevant fiscal period are included in the comparable store sales metrics up to the last full fiscal month of operations.

The method of calculating sales metrics varies across the retail industry. As a result, our comparable sales metrics may not be comparable to those of other retailers.

U.S. Wholesale segment net sales decreased $37.1 million, or 16.6%, to $186.9 million. The decrease was primarily driven by macroeconomic factors, including inflationary pressures, increased interest rates, and risk of recession, as well as planned inventory reductions by our wholesale customers, driving lower consumer replenishment demand. Units sold decreased mid-teens, while average selling prices per unit was relatively consistent period over period.

International segment net sales decreased $7.7 million, or 7.9%, to $89.9 million. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Canadian dollar, had a $1.2 million unfavorable effect on International segment net sales. The decrease in net sales was primarily driven by decreased net sales in Canada and decreased demand from our

international partners, partially offset by growth in sales in our Mexico retail stores and increased average selling prices per unit. Units sold decreased low-teens, while average selling prices per unit increased mid-single digits.

Canadian comparable net sales, including retail stores and eCommerce, decreased 7.1% primarily driven by decreased traffic in our retail stores and eCommerce channel. As of July 1, 2023, we operated 186 stores and 50 stores in Canada and Mexico, respectively. As of December 31, 2022, we operated 187 and 49 stores in Canada and Mexico, respectively. As of July 2, 2022, we operated 185 and 43 stores in Canada and Mexico, respectively.

International segment operating income decreased $5.5 million, or 45.0%, to $6.7 million, primarily due to a decrease in gross profit of $2.0 million and an increase in SG&A expenses of $3.0 million. Operating margin decreased 510 bps to 7.4%. The primary drivers of the decrease in operating margin were a 640 bps increase in the SG&A rate, partially offset by a 170 bps increase in gross margin. The increase in gross margin was primarily due to increased average selling prices per unit and decreased fabric purchase commitment charges and inventory provisions, partially offset by increased average cost per unit sold. Average cost per unit sold increased low-single digits, reflecting increases to product input costs, partially offset by decreased ocean freight rates. The increase in the SG&A rate was primarily due to fixed cost deleverage on decreased sales, increased investments in our Mexican retail stores and technology, and increased performance-based compensation expense.

Unallocated corporate expenses include corporate overhead expenses that are not directly attributable to one of our business segments and include unallocated accounting, finance, legal, human resources, and information technology expenses, occupancy costs for our corporate headquarters, and other benefit and compensation programs, including performance-based compensation.

Unallocated corporate expenses increased $0.7 million, or 2.6%, to $26.5 million and unallocated corporate expenses, as a percentage of consolidated net sales, increased 70 bps to 4.4%. The increase as a percentage of consolidated net sales was primarily due to fixed cost deleverage on decreased sales, increased consulting and professional fees, and increased performance-based compensation expense.

TWO FISCAL QUARTERS ENDED JULY 1, 2023 COMPARED TO TWO FISCAL QUARTERS ENDED JULY 2, 2022

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