Carter’s, Inc. — Form 10-K Summary
Period clarification: Although the request metadata says “2017 Q4,” this filing is the annual report for the 52-week fiscal year ended December 29, 2018. It also reports fourth-quarter 2018 results and comparative fourth-quarter 2017 results.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel and related products under Carter’s, OshKosh, and Skip Hop brands. Its reporting segments are U.S. Retail, U.S. Wholesale, and International. Fiscal 2018 ended December 29, 2018; fiscal 2017 ended December 30, 2017. Both years had 52 weeks.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $3,462.3 million | $3,400.5 million | Up 1.8% |
| Gross profit / margin | $1,497.5 million / 43.3% | $1,483.4 million / 43.6% | Profit up 1.0%; margin down 0.3 percentage points |
| Operating income / margin | $391.4 million / 11.3% | $419.6 million / 12.3% | Down 6.7%; margin down 1.0 percentage point |
| Net income | $282.1 million | $302.8 million | Down 6.9% |
| Diluted EPS | $6.00 | $6.24 | Down 3.8% |
| Operating cash flow | $356.2 million | $329.6 million | Up $26.6 million |
| Capital expenditures | $63.8 million | $69.5 million | Down $5.7 million |
Interest expense rose to $34.6 million from $30.0 million. The effective tax rate was 20.8%, versus 22.6%; FY2017 included a $40.0 million tax benefit from the U.S. Tax Cuts and Jobs Act.
FY2018 segment sales were $1,851.2 million in U.S. Retail (up 4.3%), $1,180.7 million in U.S. Wholesale (down 2.4%), and $430.4 million International (up 3.6%). U.S. Retail comparable sales increased 2.8%. U.S. Wholesale unit shipments fell 3.0%, primarily reflecting reduced demand associated with customer bankruptcies.
Fourth-quarter FY2018 sales were $1,086.4 million, operating income $170.6 million, net income $130.6 million, and diluted EPS $2.83. In fourth-quarter FY2017, the corresponding figures were $1,027.9 million, $146.4 million, $136.1 million, and $2.85.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $170.1 million at year-end, compared with $178.5 million a year earlier; working capital was $715.5 million.
- Debt principal was $596.0 million: $400.0 million of 5.25% senior notes due August 2021 and $196.0 million drawn on the revolving facility. Balance-sheet debt, net of issuance costs, was $593.3 million.
- Undrawn revolving-facility availability was $549.0 million, after letters of credit. The facility was extended to September 2023; the company reported compliance with its financial covenants.
- Inventory increased 4.6% to $574.2 million. Accounts receivable rose 7.4% to $258.3 million, primarily due to timing of wholesale customer receipts.
- Operating cash flow was $356.2 million; cash used in financing was $298.9 million, including $193.0 million of share repurchases and $83.7 million of dividends.
Material changes, outlook, risks, and unusual items
- Sales growth was led by U.S. Retail and International, while U.S. Wholesale declined. Retail growth included new stores and e-commerce; comparable retail store sales declined $15.8 million, partly offset by $60.7 million of e-commerce growth.
- Margin pressure reflected higher e-commerce shipping costs, inventory provisions, promotional activity, and the loss of higher-margin wholesale customers. SG&A increased 3.4%, including higher store, labor, freight, bankruptcy-related, marketing, and technology costs.
- FY2018 included approximately $12.8 million of customer-bankruptcy charges, partly offset by a $1.9 million recovery settlement. International results included approximately $5.3 million of costs related to changes in the China business model, including inventory and severance charges.
- Management expected approximately $85 million of capital expenditures in fiscal 2019, principally for stores, technology, and distribution. It stated that cash, operating cash flow, and available revolver capacity were expected to meet foreseeable needs. No specific earnings or sales guidance was provided.
- Upon adopting the new lease standard, the company expected to recognize operating lease liabilities of $800–$900 million and right-of-use assets of $650–$750 million. It did not expect a material effect on results of operations or cash flows.
- Key risks include wholesale-customer concentration and credit exposure, dependence on a limited number of Asian suppliers, tariffs and trade disruption, consumer demand and promotional pressure, inventory forecasting, weather and seasonality, foreign exchange and variable-rate debt, and execution of e-commerce and international strategies.
- The Skip Hop indefinite-lived tradename had a $56.8 million carrying value and estimated fair value only 14% above carrying value; management reported no impairment but identified it as at risk if projections or market conditions weaken. The company also disclosed costs and management distraction associated with proceedings related to earlier SEC and U.S. Attorney investigations; it said no current legal proceeding was expected to have a material adverse effect.
Important facts for investors to verify
- Whether wholesale customer bankruptcies and receivable concentrations continue to affect shipments, bad-debt expense, and cash collection.
- Whether the reduced operating margin stabilizes, particularly in wholesale and International, and whether inventory provisions and e-commerce fulfillment costs ease.
- Actual fiscal 2019 capital spending and progress against management’s liquidity outlook, including debt maturities and revolver availability.
- Performance of the China business and the Skip Hop brand, including the assumptions supporting the tradename valuation.
- Effects of tariffs, sourcing concentration, currency movements, and lease-standard adoption on costs, reported liabilities, and cash flows.