Carter’s, Inc. — Form 10-Q Summary
Period clarification: The filing provided is for the quarter ended October 2, 2010, not 2009 Q3 as stated in the request metadata. The comparable prior-year quarter ended October 3, 2009. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel under Carter’s, OshKosh, and related brands through wholesale, mass-channel, retail, eCommerce, and licensing operations. At quarter-end, it operated 297 Carter’s and 177 OshKosh stores. Results are unaudited; the company notes its business is seasonal, with historically about 57% of sales generated in the second half of the fiscal year.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $517.9 | $481.5 | $1,254.0 | $1,165.0 |
| Gross profit / margin | $192.8 / 37.2% | $185.6 / 38.5% | $489.9 / 39.1% | $438.0 / 37.6% |
| Operating income / margin | $79.9 / 15.4% | $81.0 / 16.8% | $184.5 / 14.7% | $139.3 / 12.0% |
| Net income / margin | $49.7 / 9.6% | $49.4 / 10.3% | $111.6 / 8.9% | $82.6 / 7.1% |
| Diluted EPS | $0.83 | $0.84 | $1.86 | $1.41 |
For the first nine months, net cash from operations was $5.2, down from $61.1 a year earlier; capital expenditures were $29.5 versus $25.8. Cash and equivalents were $182.3 at October 2, 2010. Receivables were $171.5 and inventories $263.8, up 34% and 18%, respectively, from October 3, 2009.
At quarter-end, debt was $232.2 under the term loan, with no revolver borrowings and approximately $8.6 of letters of credit. The company prepaid about $100 million of term debt during Q2. On October 15, 2010, it entered a new five-year $375 million revolving facility and used it to repay the term loan and pay $3.8 of fees and expenses; management reported approximately $130 million available after letters of credit. A roughly $1.2 debt-issuance-cost write-off was expected in Q4.
Material changes versus comparable periods
- Q3 sales rose 7.6%, but operating income fell 1.4% and net income increased only 0.5%. Gross margin contracted 1.3 percentage points, primarily due to approximately $6.0 of higher expedited inbound air freight costs affecting Carter’s wholesale and mass-channel margins.
- Nine-month sales increased 7.6%, operating income 32.5%, and net income 35.0%. Gross margin improved 1.5 percentage points, reflecting stronger retail margins and Carter’s wholesale performance. The prior-year period included $11.4 of workforce-reduction and facility-related costs.
- Carter’s wholesale sales and retail sales grew; mass-channel sales declined 4.5% in Q3, including lower Child of Mine sales at Walmart following assortment and floor-space changes. Retail comparable sales rose 1.4% at Carter’s and 0.6% at OshKosh in Q3.
- Interest expense declined year over year, reflecting lower average borrowings and rates. The company repurchased 1.84 million shares for $44.1 during the first nine months.
Outlook, risks, contingencies, and unusual items
- Management expected approximately $40 million of fiscal 2010 capital expenditures, principally for store openings, remodels, and wholesale fixtures; plans called for 30 Carter’s store openings and 13 OshKosh openings with three closures. No specific earnings or revenue guidance is provided in the filing.
- Management believed operating cash, cash on hand, and revolver availability would fund foreseeable working-capital and capital needs, while cautioning that there was no assurance. It attributed weak operating cash generation to working-capital changes, particularly receivables and inventory.
- Risks include promotional and selling-price pressure, rising cotton, labor, freight and other sourcing costs, possible Asian currency appreciation, foreign supply-chain disruption, consumer demand, inventory forecasting, and dependence on major customers. The top eight customers represented about 42% of Q3 sales; Kohl’s represented about 11%.
- The company disclosed SEC and U.S. Attorney’s Office inquiries related to customer margin support, two consolidated shareholder class actions and a derivative action. It said it could not predict the inquiries’ duration, cost, scope, or outcome and intended to defend the litigation.
- Disclosure controls and procedures were deemed ineffective at October 2, 2010 due to material weaknesses in internal control over financial reporting. Remediation steps were underway; management expected remaining efforts to be completed in Q4 2010.
- Gross unrecognized tax benefits were approximately $8.3, including about $1.6 for which the statute of limitations was expected to expire within the next fiscal year. The filing also identifies potential impairment risk for $136.6 of goodwill and $305.7 of indefinite-lived tradenames.
Important facts for investors to verify
- Confirm the period: the filing is Q3 2010, despite the request’s “2009 Q3” label.
- Track whether receivables and inventory convert to cash and whether operating cash flow recovers after the reported working-capital outflow.
- Review the new revolving facility’s pricing, covenant headroom, availability, and subsequent-period borrowings.
- Monitor gross-margin effects from freight, input-cost inflation, promotional activity, and mass-channel customer changes.
- Follow remediation of the material control weaknesses and developments in the SEC/DOJ inquiries and shareholder litigation.