Carter’s, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the fiscal quarter ended March 29, 2014, compared with the quarter ended March 30, 2013. Although the request metadata labels the period “2013 Q1,” the filing itself reports first-quarter fiscal 2014 results. Carter’s designs, sources, and markets children’s apparel through wholesale, retail, eCommerce, licensing, and international channels. It operated 780 retail stores at quarter-end.
Financial performance and position
- Revenue: Net sales were $651.6 million, up 10.3% year over year. Growth came from Carter’s wholesale and retail, OshKosh retail, and international sales; OshKosh wholesale declined. Currency movements reduced international sales by about $4.0 million.
- Profit and margins: Gross profit rose 7.7% to $261.7 million, but gross margin fell to 40.2% from 41.1%, reflecting higher product costs partly offset by pricing. Operating income declined 8.1% to $61.5 million; operating margin was 9.4% versus 11.3%. Net income decreased 17.2% to $34.3 million; diluted EPS was $0.63 versus $0.69.
- Cash flow and investment: Operating cash flow was $30.6 million, down from $53.1 million, primarily due to less favorable working-capital changes and lower earnings. Capital expenditures were $32.1 million, resulting in approximately $1.5 million of negative operating cash flow less capital expenditures. Cash declined $9.3 million during the quarter to $277.2 million.
- Liquidity and debt: Current assets were $909.1 million and current liabilities $178.7 million. Debt totaled $586.0 million: $400 million of 5.25% senior notes due 2021 and $186 million drawn on a revolving facility. The company reported $180.7 million of revolver availability, net of $8.3 million of letters of credit, and compliance with financial covenants.
- Shareholder returns: The company paid a quarterly dividend of $0.19 per share and repurchased $2.3 million of shares in open-market transactions. It also completed settlement of its accelerated share repurchase program, receiving approximately one million additional shares during the quarter.
Material changes versus the prior comparable period
- Sales rose $60.6 million, while operating income fell $5.4 million and net income fell $7.1 million.
- Interest expense increased to $6.9 million from $1.3 million, mainly reflecting the $400 million senior-note issuance in 2013 and higher average borrowings.
- SG&A increased 13.3% to $210.1 million. Drivers included new-store expenses, $6.3 million of H.W. Carter tradename amortization, distribution and freight costs, and legal, consulting, and IT costs. Lower office-consolidation costs partly offset the increases.
- Cash from operations declined, while capital spending was broadly similar to the prior-year quarter. Debt was $586 million versus $186 million a year earlier.
- Retail stores increased from 690 to 780. Carter’s direct-to-consumer comparable sales rose 1.0%; OshKosh direct-to-consumer comparable sales rose 7.7%. Canada comparable store sales declined 10.2%.
Outlook, management commentary, risks, and unusual items
- Management planned approximately $100 million of fiscal 2014 capital expenditures, about 60 Carter’s store openings and 24 OshKosh openings, plus approximately 22 Canadian openings. The company cautioned that first-half seasonality means quarterly results may not indicate full-year performance. Fiscal 2014 is a 53-week year ending January 3, 2015.
- Management anticipated higher 2014 product costs, particularly foreign-manufacturer labor costs; inability to offset cost increases through pricing or other measures could pressure profitability. A 1% change in the effective rate on variable-rate debt would change annual interest cost by about $1.9 million.
- The company expected about $3.0 million of additional fiscal 2014 office-consolidation costs and about $1.2 million of additional costs to exit Japan retail operations. Japan operations recorded $4.4 million in sales and a $1.1 million operating loss in the quarter, including exit costs and benefits; a favorable inventory recovery contributed approximately $1.0 million in cost-of-goods-sold benefit.
- Risks highlighted include reliance on major customers and concentrated suppliers, consumer demand and fashion trends, foreign sourcing and currency exposure, distribution transition and capacity, substantial debt and restrictive covenants, and potential supply-chain disruption. The contract at the port used for most products was scheduled to expire July 1, 2014.
- The company disclosed ordinary-course claims and lawsuits, but said it was not then party to proceedings it believed would materially adversely affect its financial position, results, or cash flows. It also described continuing potential legal costs related to previously disclosed investigations.
- Other notable items include $11.6 million of gross unrecognized tax benefits and a $16.3 million contingent-consideration liability related to the Bonnie Togs acquisition. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth can translate into improved operating margins as product and distribution costs rise.
- Inventory levels, sell-through, and working-capital movements, given the year-over-year inventory increase and lower operating cash flow.
- Execution of store-opening, capital-spending, Braselton distribution, office-consolidation, and Japan-exit plans, including remaining costs.
- Debt-service capacity, revolver availability, covenant headroom, and the effect of variable interest rates.
- Exposure to major customers and concentrated vendors, and potential disruption around the port labor contract expiration.
- Whether planned dividends and repurchases remain feasible under credit-facility and note covenants and future cash-flow needs.