Carter’s, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2017 Q1, but the filing is for the fiscal quarter ended March 31, 2018, compared with the quarter ended April 1, 2017. Amounts below are in U.S. dollars.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel and related products under Carter’s, OshKosh B’gosh, Skip Hop, and other brands. It sells through wholesale, company-operated stores, eCommerce, and licensing; it operated 1,039 retail stores at quarter-end. Results are seasonal and interim results may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $755.8 million | $732.8 million | +3.1% |
| Gross profit / margin | $332.5 million / 44.0% | $315.7 million / 43.1% | Profit +5.3%; margin +0.9 percentage points |
| Operating income / margin | $60.3 million / 8.0% | $78.5 million / 10.7% | Income -23.1% |
| Net income | $42.5 million | $46.6 million | -8.9% |
| Diluted EPS | $0.89 | $0.95 | -$0.06 |
| Operating cash flow | $64.1 million | $84.2 million | -$20.1 million |
SG&A increased 13.1% to $280.2 million, rising from 33.8% to 37.1% of sales. Interest expense was $8.0 million, versus $7.1 million. The effective tax rate fell to 19.7% from 35.0%, mainly reflecting the U.S. Tax Cuts and Jobs Act. Cash and cash equivalents were $180.3 million; current assets were $935.1 million and current liabilities $225.9 million. Long-term debt, net, was $617.5 million, comprising $400 million of 5.25% senior notes due in 2021 and $221 million drawn on the revolving facility. Cash less reported debt was approximately $437.3 million net debt.
Investing cash outflow was $14.4 million, including $14.7 million of capital expenditures; financing cash outflow was $48.3 million, including $25.2 million of share repurchases and $21.2 million of dividends. Cash increased by $1.8 million to $180.3 million.
Material changes versus the prior comparable period
- U.S. Retail sales rose 5.5% to $383.7 million; comparable net sales increased 3.0%, driven primarily by eCommerce, while comparable store sales declined.
- U.S. Wholesale sales fell 4.0% to $280.8 million, reflecting a 7.0% drop in units shipped, partly offset by higher average unit prices.
- International sales grew 19.3% to $91.2 million, including contributions from acquisitions and favorable currency translation.
- Gross margin improved on favorable product costs, higher-margin retail mix, and foreign exchange, partly offset by wholesale margin pressure and higher inventory provisions. Lower royalty income and higher SG&A more than offset the gross-profit gain, reducing operating income.
- Operating cash flow declined, primarily due to lower net income and working-capital timing. Prior-year investing outflow included $143.7 million for the Skip Hop acquisition, unlike the current quarter.
Outlook, commentary, risks, and unusual items
- Management estimated a fiscal 2018 effective tax rate of approximately 22% and planned approximately $100 million in full-year capital expenditures. The filing provides no full-year sales or earnings guidance.
- Management cited a $12.8 million customer-bankruptcy charge in U.S. Wholesale; the event contributed to a marked decline in that segment’s operating margin. The filing also reports approximately $11.1 million of first-quarter doubtful-account provision.
- Fiscal 2018 store plans included 53 U.S. openings and 39 closures, and 11 Canadian and 7 Mexican openings. The U.S. store count was 818 at quarter-end.
- The company reported $524.5 million available under its revolving facility and compliance with its covenants. Borrowings were variable-rate at 3.25%; management estimated a 1 percentage-point rate change would alter annual pretax interest expense by about $2.2 million.
- Key exposures include seasonality, foreign-exchange movements, variable interest rates, customer credit, and supplier commitments. Management said there were no material changes to the risk factors in its latest Form 10-K and no pending legal proceeding believed likely to materially affect the company.
- ASC 606 was adopted retrospectively; disclosed effects on prior-period earnings were small. The company expected adoption of the new lease standard in fiscal 2019 to add material lease assets and liabilities, without a material effect on results or cash flows.
Important facts for investors to verify
- Confirm the period: this filing reports Q1 2018, notwithstanding the 2017 Q1 request metadata.
- Assess the customer bankruptcy’s full credit exposure and whether wholesale demand and profitability recover.
- Track whether eCommerce and International growth offset weaker wholesale and comparable store trends, and whether elevated SG&A moderates.
- Review cash conversion, inventory and receivable quality, and the impact of planned capital spending and shareholder returns on liquidity and debt.
- Monitor the final tax-reform accounting, the estimated 22% full-year tax rate, and floating-rate debt costs.