Carter’s, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the unaudited fiscal quarter ended March 30, 2013, compared with the quarter ended March 31, 2012. This differs from the request metadata’s “2012 Q1.” Dollar 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, selling through wholesale, company-operated retail, eCommerce, international operations, and licensing. At quarter-end it operated 423 Carter’s U.S. stores, 164 OshKosh U.S. stores, and 103 international stores. Japan operations began during the quarter.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $591.0 million | $551.7 million | +7.1% |
| Gross profit / gross margin | $243.1 million / 41.1% | $194.7 million / 35.3% | Margin +5.8 percentage points |
| Operating income / margin | $66.9 million / 11.3% | $53.8 million / 9.8% | +24.4% |
| Net income | $41.4 million | $32.3 million | +28.3% |
| Diluted EPS | $0.69 | $0.54 | Increased |
| Operating cash flow | $53.1 million | $82.4 million | Decreased |
| Capital expenditures | $31.4 million | $16.4 million | Increased |
SG&A rose 23.8% to $185.4 million, or 31.4% of sales versus 27.1%; it included $8.0 million of office-consolidation costs. The filing attributes improved gross margin principally to lower product costs and a higher direct-to-consumer contribution. The effective tax rate was 36.5%, versus 37.4%.
At March 30, 2013, cash and cash equivalents were $397.6 million; current assets were $913.8 million and current liabilities $170.5 million. Working capital was approximately $743.3 million. Inventory was $284.5 million, down from $349.5 million at fiscal year-end but up 7.1% from March 2012. Cash increased $15.3 million during the quarter. Operating cash flow was lower year over year, primarily due to less favorable working-capital changes, partly offset by higher earnings.
Long-term debt was $186.0 million, all reported as long-term, with no current maturities. The revolving facility had $175.0 million available after $186.0 million of borrowings and $13.9 million of letters of credit; the effective quarter-average borrowing rate was 2.58%. The company reported compliance with financial covenants. Total liabilities were $574.5 million and stockholders’ equity was $1,023.2 million.
Material changes and operating trends
- Carter’s retail sales increased 17.6% to $208.4 million, supported by new stores and eCommerce; comparable-store sales rose 0.6%. Carter’s wholesale sales declined 0.5%.
- OshKosh retail sales declined 4.6%, with comparable-store sales down 9.5%; OshKosh wholesale sales declined 10.3%.
- International sales increased 30.3% to $60.9 million, including growth in Canada, wholesale, and new Japan operations.
- Operating income benefited from sales and gross-margin growth, while SG&A increased due to retail expansion, distribution and freight, eCommerce and Japan costs, and office consolidation.
- Capital spending included approximately $15.4 million for the Braselton, Georgia distribution facility, $9.0 million for store openings and remodelings, and $5.2 million for information technology.
Outlook, risks, contingencies, and unusual items
- No full-year earnings or revenue guidance is provided. Management planned approximately $200 million of fiscal 2013 capital expenditures.
- Management expected fiscal 2013 office-consolidation expenses of approximately $35–$39 million, including about $33 million of cash charges and $4 million of non-cash accelerated depreciation; completion was expected substantially by year-end. Hogansville facility closure charges of approximately $2.2 million were expected in fiscal 2013.
- Fiscal 2013 store plans included approximately 60 Carter’s U.S. openings and five closures, 15 OshKosh openings and five closures, and 22 Canadian openings and one closure.
- Management said cash on hand, operating cash flow, and revolver availability should fund working-capital and capital needs for the foreseeable future, while cautioning that this is not assured. Results are seasonal and first-half performance may not indicate full-year results. Product costs were expected to remain above historical levels.
- Key risks include dependence on major customers and foreign sourcing, consumer-demand and fashion shifts, cost inflation and price competition, supply-chain concentration, inventory forecasting, retail execution, international expansion, eCommerce and IT disruption, and the office and distribution transitions.
- Other notable items include $8.0 million of office-consolidation charges in the quarter; $0.6 million of Hogansville closure costs; $30.0 million of discounted contingent consideration related to the Bonnie Togs acquisition; and $10.6 million of gross unrecognized tax benefits. The company repurchased 156,600 shares for approximately $8.9 million, with about $50.0 million of authorization remaining.
- The company disclosed routine claims and lawsuits but said it was not party to proceedings believed likely to have a material adverse effect. It also described continuing potential legal costs and management distraction associated with previously disclosed investigations.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers Q1 2013, not Q1 2012.
- Track whether gross-margin improvement persists and whether SG&A growth moderates as expansion and consolidation costs continue.
- Assess the weak OshKosh comparable-store trend against Carter’s retail and international growth.
- Monitor operating cash flow, working-capital needs, and delivery of the planned $200 million capital program.
- Compare actual office-consolidation and distribution-transition costs and timelines with management’s estimates.
- Review revolver usage, covenant compliance, contingent consideration, and the resolution of uncertain tax positions and legal matters.