Business context and reporting period
Carter’s, Inc. designs, sources, and markets children’s apparel through wholesale, retail, eCommerce, and licensing channels. This 10-Q reports the unaudited first quarter of fiscal 2012, ended March 31, 2012, compared with the quarter ended April 2, 2011. The request metadata says “2011 Q1,” but the filing itself covers 2012 Q1. Results include Bonnie Togs, acquired June 30, 2011; the comparison quarter does not.
Financial results and liquidity
| Metric | Q1 2012 | Prior comparable quarter |
|---|---|---|
| Net sales | $551.7 million | $469.0 million |
| Gross profit / margin | $194.7 million / 35.3% | $158.1 million / 33.7% |
| Operating income / margin | $53.8 million / 9.8% | $53.6 million / 11.4% |
| Net income | $32.3 million | $32.1 million |
| Diluted EPS | $0.54 | $0.55 |
| Operating cash flow | $82.4 million | $9.3 million |
Cash and equivalents were $300.5 million at March 31, 2012; long-term debt was $236.0 million, with no current maturities. The revolving facility also had $14.5 million in outstanding letters of credit. The company reported $82.4 million of operating cash flow, spent $16.4 million on capital expenditures, and ended the quarter with cash up $67.0 million from year-end. Management attributed stronger operating cash flow primarily to favorable working-capital changes.
Material changes versus the prior comparable period
- Sales rose 17.6%, primarily reflecting Bonnie Togs, alongside growth across segments. International sales increased to $46.7 million from $15.4 million, including a full quarter of Canadian operations.
- Gross margin expanded 160 basis points, reflecting price increases and direct-to-consumer growth, partly offset by approximately $35 million of higher product costs.
- Operating income was nearly flat despite higher sales; SG&A increased 31.6% to $149.7 million and rose to 27.1% of sales from 24.3%. The filing cites Bonnie Togs costs, higher performance compensation, facility closure charges, and contingent-consideration accretion.
- Net income increased only 0.5%; diluted EPS declined to $0.54 from $0.55. The effective tax rate decreased to 37.4% from 38.0%.
- Segment sales: Carter’s wholesale $249.5 million (+3.3%); Carter’s retail $177.2 million (+28.5%); OshKosh retail $58.0 million (+7.4%); OshKosh wholesale $20.3 million (+1.0%). Carter’s and OshKosh retail comparable sales increased 6.7% and 4.7%, respectively.
Outlook, commentary, risks, and unusual items
- No full-year earnings or sales guidance is provided. Management expects cash, operating cash flow, and revolver availability to fund working capital and investment needs for the foreseeable future, while noting this is not assured.
- Fiscal 2012 capital expenditures are planned at approximately $90–$100 million, mainly for store openings and remodels and the Braselton, Georgia distribution facility. Store plans include approximately 63 Carter’s openings and seven closures; seven OshKosh openings and 13 closures; and 18 Canadian openings.
- Management expected elevated product costs to continue to pressure profitability and cash flow through at least the first half of fiscal 2012. Key pressures include cotton, labor, freight, and currency; price competition may limit recovery through selling prices.
- The company plans to open a larger Braselton distribution facility in June 2012 and close its Hogansville facility in 2013. It recorded $1.1 million of closure costs in Q1 and expects additional closure-related charges, including $1.8 million in termination benefits, $1.6 million in accelerated depreciation, and $1.0 million of other costs.
- Bonnie Togs contingent consideration was valued at $26.8 million, based on a high probability of meeting earnings targets; the estimate is sensitive to forecast payments, discount rate, and probability assumptions. Maximum contingent consideration is CAD $35 million.
- Debt bears variable rates; management estimated a 1 percentage-point rate change would change annual interest cost by about $2.4 million. The company said it was in compliance with credit covenants and does not anticipate paying cash dividends in the foreseeable future.
- A shareholder class-action settlement, expected to be paid by insurers, had preliminary court approval; final approval was scheduled for May 31, 2012. The filing also describes continuing SEC and U.S. Attorney’s Office investigations related to historical customer margin support, with costs and outcomes uncertain.
- Other significant risks include reliance on foreign sourcing, a sourcing agent responsible for about 75% of inventory purchases, consumer demand and fashion trends, key customer concentration (about 29% of quarterly sales from the top four), and integration of Bonnie Togs.
Important facts for investors to verify
- Separate organic sales and earnings trends from the effect of Bonnie Togs and confirm the basis for segment comparisons.
- Track whether pricing offsets higher product, labor, transportation, and foreign-exchange costs without weakening demand or margins.
- Assess the assumptions and remeasurement of the $26.8 million Bonnie Togs earnout liability and progress in integrating the Canadian business.
- Monitor capital spending, distribution-facility transition costs, and execution of the planned store openings and closures.
- Review debt availability, variable-rate exposure, covenant headroom, and the outcomes of the pending settlement approval and ongoing investigations.