Carter’s, Inc. — Form 10-K summary
Period clarification: The filing covers fiscal 2010, ended January 1, 2011. The quarterly table separately reports fiscal 2009 fourth-quarter results, which are summarized below in response to the requested 2009 Q4 period. Fiscal 2009 ended January 2, 2010; both fiscal 2009 and fiscal 2010 comprised 52 weeks.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel under the Carter’s and OshKosh brands, selling through wholesale, mass-market, retail-store, eCommerce, and licensing channels. At fiscal year-end it operated 486 stores. Carter’s was the larger business, contributing 80.2% of fiscal 2010 sales; OshKosh contributed 19.8%.
Financial performance
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net sales | $1,749.3 million | $1,589.7 million |
| Gross profit / margin | $673.9 million / 38.5% | $604.4 million / 38.0% |
| Operating income / margin | $243.3 million / 13.9% | $195.6 million / 12.3% |
| Income before taxes | $233.4 million | $183.8 million |
| Net income | $146.5 million | $115.6 million |
| Diluted EPS | $2.46 | $1.97 |
| Operating cash flow | $85.8 million | $188.9 million |
| Capital expenditures | $39.8 million | $33.6 million |
| Cash and cash equivalents, year-end | $247.4 million | $335.0 million |
| Total debt, year-end | $236.0 million | $334.5 million |
| Working capital, year-end | $532.9 million | $505.1 million |
Fiscal 2009 Q4: Net sales were $424.7 million, gross profit $166.4 million, operating income $56.3 million, net income $33.0 million, and diluted EPS $0.56. These are unaudited quarterly figures.
Fiscal 2010 sales rose 10.0% and net income rose 26.7% year over year. Carter’s wholesale sales grew 15.4%; Carter’s retail grew 11.5%, including a 2.5% comparable-store increase. OshKosh retail sales increased 3.0%, but comparable-store sales fell 1.9%. Mass-channel sales rose 5.8%, as growth at Target partly offset lower Walmart sales. Gross margin improved 50 basis points. Operating cash flow declined substantially, primarily because of working-capital changes; inventories increased to $298.5 million from $214.0 million.
Liquidity, debt, and capital allocation
In October 2010, the company replaced its former term loan with a $375 million revolving credit facility maturing October 15, 2015. At year-end, revolver borrowings were $236.0 million and approximately $130 million was available, net of letters of credit. Management reported compliance with covenants. The facility has variable rates; a 1 percentage-point rate change would affect annual interest cost by approximately $2.4 million. Fiscal 2010 financing cash outflow was $134.0 million, including $50.0 million of share repurchases. The company did not anticipate paying cash dividends in the foreseeable future.
Outlook, commentary, risks, and unusual items
- Management expected higher cotton, labor, transportation, and currency-related product costs to pressure profitability and cash flow through at least fiscal 2011; planned price increases were not expected to fully offset them near term.
- Fiscal 2011 capital expenditures were estimated at approximately $50 million. Plans included about 55 Carter’s store openings and four closures, and about four OshKosh openings and three closures.
- Key exposures include dependence on major retailers (the top eight customers represented about 41% of fiscal 2010 sales; Kohl’s about 10%), foreign sourcing, and reliance on one sourcing agent for approximately 90% of inventory purchases. Competition, consumer spending, inventory forecasting, store leases, product safety, and brand reputation are also cited risks.
- The company and SEC entered a non-prosecution agreement in December 2010 concerning the customer margin-support investigation, conditioned on continued cooperation. The company said it expected further legal and accounting costs; a related U.S. Attorney’s Office investigation remained ongoing. Consolidated shareholder class actions and a derivative action were also pending, with outcomes and costs not predictable from the filing.
- Fiscal 2010 included a $1.2 million write-off of unamortized debt issuance costs on repayment of the former term loan. Fiscal 2009 included $5.7 million of investigation expenses and $10.8 million of workforce, facility, and closure costs. The filing reported no goodwill or tradename impairment in fiscal 2010.
- Management and the auditor concluded internal control over financial reporting was effective at January 1, 2011. Previously identified weaknesses related to customer accommodations and the sales control environment were reported as remediated.
Important facts for investors to verify
- Confirm the intended period: the filing is the fiscal 2010 Form 10-K, while fiscal 2009 Q4 is presented only in unaudited quarterly data.
- Assess whether inventory growth and weaker operating cash flow reflect timing and business growth or create markdown, working-capital, or liquidity pressure.
- Track product-cost inflation, the company’s ability to raise prices, and resulting gross-margin trends.
- Review revolver availability, variable-rate exposure, covenant headroom, and the substantial lease and inventory-purchase commitments.
- Monitor the outstanding investigations and litigation, including potential expenses, indemnification obligations, and any developments after the filing date.