Carter’s, Inc. — Form 10-Q Summary
Period: Fiscal quarter and first two fiscal quarters ended June 29, 2013; comparable periods ended June 30, 2012. The request metadata says “2012 Q2,” but the filing is for 2013 Q2.
Business context
Carter’s designs, sources, and markets children’s apparel under Carter’s, OshKosh, and other brands through wholesale, retail, eCommerce, licensing, and international channels. At quarter-end, it operated 438 Carter’s U.S. stores, 164 OshKosh U.S. stores, and 107 international stores.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $517.9 million | $472.2 million | $1,108.9 million | $1,023.8 million |
| Gross profit | $220.2 million | $183.2 million | $463.3 million | $378.0 million |
| Gross margin | 42.5% | 38.8% | 41.8% | 36.9% |
| Operating income | $32.7 million | $34.4 million | $99.7 million | $88.2 million |
| Net income | $19.7 million | $20.8 million | $61.1 million | $53.1 million |
| Diluted EPS | $0.33 | $0.35 | $1.02 | $0.89 |
Second-quarter sales increased 9.7%, while net income declined 5.4%. First-half sales rose 8.3% and net income rose 15.1%. Gross-margin improvement reflected lower product costs and a greater contribution from direct-to-consumer businesses. Quarterly SG&A rose 24.8% to $195.0 million, including office-consolidation, retail, distribution, Japan, employee-benefit, and eCommerce costs.
For the first half, operating cash flow was $69.8 million, down from $89.9 million. Capital expenditures were $70.6 million, versus $37.7 million, and cash used in investing was $108.6 million, including $38.0 million for acquired tradenames. Cash declined $70.1 million from year-end to $312.1 million. At June 29, total assets were $1.70 billion and stockholders’ equity was $1.02 billion.
Long-term debt was $186.0 million, all under the revolving credit facility; $15.3 million of letters of credit were outstanding, with approximately $173.7 million available. The company reported covenant compliance. The effective borrowing rate was 1.70% at quarter-end; the filing estimates a 1% rate change would affect annual interest cost by approximately $1.9 million.
Material changes and unusual items
- Carter’s retail sales grew 17.8% in Q2, including new-store and eCommerce growth; comparable sales rose 3.9%. OshKosh retail sales fell 3.2%, with comparable sales down 5.1%.
- International sales grew 44.9% in Q2, including sales from Japan, where operations began in Q1. Carter’s wholesale sales increased 1.1%; OshKosh wholesale sales declined 11.6%.
- Operating income declined in Q2 despite higher sales and gross margin, reflecting higher SG&A. Office consolidation costs were $10.2 million in Q2 and $18.2 million in the first half.
- The company paid $38.0 million in cash for worldwide rights to the Carter’s Watch the Wear and H.W. Carter & Sons tradenames; these assets are amortized over three years.
- The company repurchased 590,002 shares for $37.8 million in the first half and paid a $0.16-per-share dividend. A $300 million repurchase authorization was approved, with approximately $283.6 million remaining at quarter-end.
Outlook, risks, and contingencies
Management planned approximately $200 million of fiscal 2013 capital expenditures, mainly for stores, distribution capacity, and the Atlanta headquarters. It expected fiscal 2013 office-consolidation expenses of approximately $37–$41 million, including about $35 million of cash charges and $4 million of non-cash accelerated depreciation; substantial completion was expected by year-end. The company also expected approximately $2.5 million of 2013 Hogansville facility closure charges. First-half results are not necessarily indicative of full-year results, and the business is seasonal.
Risks highlighted include dependence on major customers and foreign sourcing, supply-chain and port disruptions, fashion and consumer-spending shifts, cost inflation and pricing pressure, inventory forecasting, execution of distribution and office transitions, international expansion, foreign currency and variable-rate debt exposure, and cybersecurity. The top four customers represented approximately 25% of first-half sales. A contingent-consideration liability of approximately $30.0 million related to the Bonnie Togs acquisition remained recorded. Gross unrecognized tax benefits were approximately $10.6 million. Management said it was not party to legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether the strong gross-margin gains persist as product costs, selling prices, and channel mix change.
- Whether store growth, eCommerce, Japan, and international wholesale expansion generate adequate returns, particularly given OshKosh comparable-sales weakness.
- Final costs and operational effects of the office consolidation, distribution-facility transition, and planned capital spending.
- Working-capital and inventory trends: first-half inventory cash use was $81.4 million, and quarter-end inventory was $429.2 million.
- Availability under the revolver and compliance with conditions governing dividends and repurchases, including leverage and minimum availability requirements.