Carter’s, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2015 Q1, but the supplied filing is for the fiscal quarter ended April 2, 2016, with comparison to the quarter ended April 4, 2015. Financial amounts below are in U.S. dollars.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel under Carter’s, OshKosh and other brands through wholesale, retail, eCommerce and licensing channels. At April 2, 2016, it operated 610 Carter’s U.S. stores, 251 OshKosh U.S. stores and 149 Canadian stores. The company notes that first-half results are typically weaker than second-half results because of seasonality.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $724.1 million | $684.8 million | +5.7% |
| Gross profit / margin | $310.9 million / 42.9% | $284.1 million / 41.5% | Profit +9.5% |
| Operating income / margin | $93.0 million / 12.8% | $84.5 million / 12.3% | +10.1% |
| Net income | $54.0 million | $49.8 million | +8.4% |
| Diluted EPS | $1.04 | $0.94 | Increased |
| Operating cash flow | $128.3 million | $87.2 million | Increased |
| Capital expenditures | $25.6 million | $20.8 million | Increased |
Gross margin improved primarily from lower product costs and stronger International segment margin. SG&A rose 8.4% to $229.0 million and increased from 30.8% to 31.6% of sales, largely reflecting store growth, eCommerce and marketing costs. The effective tax rate was 35.2%, versus 34.5%; the prior-year rate benefited from tax-audit settlements.
Cash and cash equivalents were $395.1 million at quarter-end. Long-term debt, net of issuance costs, was $580.3 million, comprising $394.8 million of senior notes and $185.6 million of revolving-facility borrowings. The resulting debt less cash was approximately $185.2 million. The company had $309.6 million available under its revolving facility and reported compliance with its covenants. Net cash used in financing was $90.2 million, including $71.6 million of share repurchases and $17.0 million of dividends.
Material changes versus the prior comparable period
- Sales growth came from Carter’s wholesale and retail, OshKosh retail, and International; OshKosh wholesale sales fell 25.8% on lower seasonal bookings.
- U.S. total retail comparable sales were nearly flat at Carter’s (-0.1%) and increased 2.7% at OshKosh. Store comparables declined at both brands, while eCommerce comparables rose 15.2% and 19.8%, respectively.
- International sales grew 13.6%; currency movements reduced consolidated sales by approximately $4.5 million. Canadian total retail comparable sales increased 14.9%.
- Operating cash flow increased, primarily reflecting higher earnings and favorable working-capital movements, including collection timing. Inventory was $376.5 million, up 5.2% year over year.
- Q1 repurchases increased to 722,364 shares for $71.6 million, compared with 157,900 shares for $14.1 million. The quarterly dividend rose to $0.33 per share from $0.22.
Outlook, commentary and risks
- Management expected approximately $115 million in fiscal 2016 capital expenditures, primarily for store openings, remodelings and IT initiatives, and projected a full-year effective tax rate of approximately 35.4%. The supplied filing text does not provide a clear numerical full-year sales or earnings forecast.
- Management projected 130 store openings and 10 closings in fiscal 2016. The company stated that cash, operating cash flow and available revolver capacity were expected to fund foreseeable requirements.
- Foreign currency exposure, particularly the U.S. dollar/Canadian dollar, affected reported sales and earnings. Open forward contracts had a $44.0 million notional value; the company recorded $2.0 million of unrealized losses on open contracts.
- A 1% change in the effective rate on variable-rate borrowings outstanding would change annual pretax interest expense by approximately $1.9 million. The company also identified supplier purchase commitments that may carry termination charges if cancelled.
- The company reported no legal proceedings it believed would materially adversely affect its financial position, results or cash flows, and no material changes to previously disclosed risk factors. It expected the new lease standard to require material right-of-use assets and lease liabilities on the balance sheet.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the supplied 10-Q covers Q1 2016, not Q1 2015.
- Assess whether retail and eCommerce growth can offset store-comparable weakness, OshKosh wholesale declines and higher operating costs.
- Review the sustainability of cash generation and planned capital spending alongside substantial repurchases and dividends.
- Monitor debt, revolver availability, covenant compliance, variable interest exposure and any restrictions on future distributions.
- Track foreign-exchange impacts, tax-rate assumptions and the company’s implementation estimates for the new lease accounting standard.