Carter’s, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and first two fiscal quarters ended July 2, 2016. The request metadata labels the period “2015 Q2,” but the filing is for 2016 Q2; year-over-year comparisons are to periods ended July 4, 2015. Figures below are in U.S. dollars.
Business context and financial performance
Carter’s designs, sources and markets children’s apparel under Carter’s, OshKosh and related brands through wholesale, retail, eCommerce and licensing channels. At quarter-end it operated 624 Carter’s U.S. stores, 262 OshKosh U.S. stores and 150 stores in Canada.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $639.5m | $612.8m | $1,363.6m | $1,297.5m |
| Gross profit / margin | $282.2m / 44.1% | $262.9m / 42.9% | $593.1m / 43.5% | $546.9m / 42.2% |
| Operating income / margin | $63.2m / 9.9% | $62.0m / 10.1% | $156.3m / 11.5% | $146.5m / 11.3% |
| Net income | $36.2m | $36.1m | $90.2m | $85.9m |
| Diluted EPS | $0.71 | $0.68 | $1.75 | $1.62 |
Q2 sales rose 4.4%, while net income was nearly flat (+0.3%); first-half sales increased 5.1% and net income 5.0%. First-half operating cash flow was $85.6m, capital expenditures were $49.7m, and cash flow after capital expenditures was approximately $35.9m. Cash declined to $205.1m from $381.2m at fiscal year-end, primarily amid substantial buybacks and dividends.
At July 2, 2016, total debt was $580.7m, comprising $400m of 5.25% senior notes due August 2021 and $185.7m drawn on the revolving facility; cash less debt was approximately $375.6m net debt. Revolver availability was $309.4m, excluding $4.8m of letters of credit. Current assets were $1,022.2m and current liabilities $271.0m. The company reported compliance with debt covenants.
Material changes and operating trends
- Gross margin improved year over year in both periods, supported by product costs and mix; management cited promotional pressure and unfavorable currency effects as offsets.
- SG&A rose 9.2% in Q2 and 8.8% in the first half, faster than sales, reflecting new stores, eCommerce, IT and marketing costs. Q2 operating margin consequently declined 0.2 percentage points despite higher sales.
- U.S. retail growth was supported by store openings and eCommerce. Q2 comparable sales were +4.4% for Carter’s Retail and -1.3% for OshKosh Retail; first-half comparables were +2.1% and +0.7%, respectively. Store-only comparables were weaker, particularly for OshKosh.
- OshKosh Wholesale sales fell 34.4% in Q2 and 29.8% in the first half, mainly from fewer units shipped and lower seasonal bookings. Carter’s Wholesale Q2 sales fell 2.8%, but first-half sales rose 1.0%.
- International sales increased 8.0% in Q2 and 10.8% in the first half, with growth in Canadian retail and eCommerce, including China. Currency reduced consolidated sales by approximately $2.5m in Q2 and $7.0m in the first half.
- First-half operating cash flow improved from $27.1m to $85.6m, with management attributing the increase to higher net income and favorable working-capital movements. Inventory was $587.4m, up 7.9% from July 2015, which the company attributed to growth and timing of strategic initiatives.
Outlook, commentary, risks and contingencies
- Management estimated a 35.4% effective tax rate for fiscal 2016 and planned approximately $110m of full-year capital expenditures, primarily for store openings/remodeling and IT. The filing does not provide a clear full-year sales or earnings forecast.
- The company cautioned that results are seasonal and first-half performance may not indicate full-year results. It projected approximately 122 store openings and 10 closings for fiscal 2016.
- Liquidity sources expected to fund foreseeable needs include cash, operating cash flow and the revolving facility. The company noted that credit agreement and note indenture provisions may restrict future dividends or repurchases.
- Risks highlighted include foreign-exchange exposure, variable-rate borrowing, promotional and demand conditions, inventory management, and possible supplier termination charges. A 1% rate change on variable-rate borrowings would affect annual pretax interest expense by approximately $1.9m.
- Q2 and first-half 2016 other expense, net, included net losses of $0.5m and $3.7m, respectively; open currency forwards had a $1.3m unrealized loss at quarter-end. Gross unrecognized tax benefits were $9.8m, including $1.0m expected to be subject to statute expiration within the next fiscal year. Management said no pending legal matter was believed likely to have a material adverse effect.
- First-half repurchases totaled $180.2m for 1.77m shares; dividends paid were $0.66 per share, versus $0.44 in the comparable 2015 period. Remaining authorized repurchase capacity was approximately $394.6m. The filing states buyback and dividend decisions remain discretionary.
Important facts for investors to verify
- Confirm the reporting-year discrepancy in the request metadata: the filing period is Q2 2016, not Q2 2015.
- Track whether improved gross margin can offset higher store, eCommerce, IT and marketing expenses, particularly as new stores mature.
- Assess the sustainability of retail and international growth against soft U.S. store comparables and declining OshKosh wholesale shipments.
- Monitor inventory growth, seasonal cash requirements, planned capital spending and the effect of repurchases and dividends on cash and net debt.
- Review currency exposure, variable-rate debt, covenant headroom, tax positions and any restrictions on shareholder distributions.