Carter’s, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2013 Q2, but this filing covers the fiscal quarter ended June 28, 2014, and the first two fiscal quarters of fiscal 2014. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context
Carter’s designs, sources, and markets children’s apparel under Carter’s, OshKosh and other brands through wholesale, retail, e-commerce, and licensing channels. At quarter-end, it operated 509 Carter’s U.S. stores, 187 OshKosh U.S. stores, and 110 stores in Canada. Fiscal 2014 is a 53-week year ending January 3, 2015.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First two quarters 2014 | First two quarters 2013 |
|---|---|---|---|---|
| Net sales | $574.1m | $517.9m | $1,225.7m | $1,108.9m |
| Gross profit / margin | $245.5m / 42.8% | $220.2m / 42.5% | $507.2m / 41.4% | $463.3m / 41.8% |
| Operating income / margin | $47.3m / 8.3% | $32.7m / 6.3% | $108.9m / 8.9% | $99.7m / 9.0% |
| Net income | $25.9m | $19.7m | $60.2m | $61.1m |
| Diluted EPS | $0.48 | $0.33 | $1.11 | $1.02 |
| Operating cash flow | Not separately presented | Not separately presented | $33.1m | $69.8m |
Q2 sales rose 10.9%, operating income 44.6%, and net income 31.6% year over year. First-half sales rose 10.5% and operating income 9.2%, while net income declined 1.5%. First-half gross margin fell 0.4 percentage points. Higher interest expense—$13.8m for the half versus $2.5m a year earlier—largely offset operating-income growth; the filing attributes the increase to the 2013 senior-note issuance and higher borrowings.
Q2 growth included Carter’s Retail sales up 17.2%, OshKosh Retail up 19.7%, and International sales up 13.1%. Carter’s wholesale grew 1.7%; OshKosh wholesale declined 7.6% for the first half. E-commerce and new store openings contributed to retail growth. Foreign exchange reduced International sales by about $2.9m in Q2 and $6.8m in the first half.
Liquidity, debt, and capital allocation
- Cash was $207.9m at June 28, 2014, down from $286.5m at December 28, 2013 and $312.1m a year earlier. First-half cash decreased $78.6m.
- First-half operating cash flow of $33.1m was below capital expenditures of $61.3m. Management attributed weaker operating cash flow primarily to working-capital needs, including planned inventory increases, higher product costs, and purchase/payment timing.
- Inventory was $538.2m, up 25.4% from June 2013; management cited supply-chain initiatives, higher product costs, planned sales, and store openings.
- Total debt was $586.0m: $400m of 5.25% senior notes due August 2021 and $186m drawn on the revolving facility. The revolver had $181m available after $8m of letters of credit; its rate was 2.15% at quarter-end. The company reported compliance with financial covenants.
- Capital expenditures were $61.3m in the first half; the company planned approximately $100m for fiscal 2014. It repurchased $36.1m of stock and paid $20.4m in dividends in the first half. Remaining repurchase authorization was about $231.2m.
Outlook, commentary, and notable items
- Management expected cash on hand, operating cash flow, and revolver availability to fund ongoing requirements for the foreseeable future, while cautioning that this is not assured. No full-year sales or earnings guidance is stated in the provided filing text.
- Fiscal 2014 plans included approximately 60 Carter’s U.S. store openings and four closures; 24 OshKosh openings and four closures; and 22 Canadian openings and two closures.
- Management anticipated higher 2014 product costs, principally from labor costs at foreign manufacturers, and warned that costs not offset by pricing or other measures could pressure profitability. The company also cited seasonal variability, with the first half generally weaker than the second.
- Office consolidation charges were $4.6m in Q2 and $6.6m for the first half; approximately $0.5m of additional fiscal-2014 costs were expected. Japan retail exit charges were $0.9m in Q2 and $1.5m in the first half, with about $0.3m of additional costs expected. The first-half results also included a $1.0m favorable inventory recovery related to the Japan exit.
- Key disclosed risks include dependence on major customers and a concentrated supplier base, foreign sourcing and port disruption, consumer demand and pricing pressure, inventory forecasting, substantial debt and variable rates, store expansion, and execution of the Braselton distribution-facility transition. The labor contract at the port used for most sourcing had expired July 1, 2014, with negotiations ongoing.
- The company disclosed $11.8m of gross unrecognized tax benefits and a $16.8m contingent-consideration liability related to the Bonnie Togs acquisition. It reported no legal proceeding believed likely to have a material adverse effect.
Most important facts for investors to verify
- Confirm the intended reporting year: the supplied filing is for Q2 2014, not Q2 2013.
- Track whether elevated inventory converts into sales and cash, and whether operating cash flow recovers after the first-half working-capital outflow.
- Assess whether margin trends, pricing, and higher sourcing and labor costs support full-year profitability.
- Monitor debt service, revolver availability, covenant headroom, and restrictions on dividends and repurchases.
- Check execution of store-opening, capital-spending, Japan-exit, office-consolidation, and distribution-facility plans, including expected additional costs.