Carter’s, Inc. — Form 10-Q summary
Period: Fiscal quarter ended March 28, 2020, compared with the quarter ended March 30, 2019. The filing is for 2020 Q1, notwithstanding the request metadata’s “2019 Q1” label. Filed May 5, 2020. Carter’s designs, sources, and sells children’s apparel and accessories through retail, e-commerce, wholesale, and licensing channels.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $654.5 million | $741.1 million |
| Gross profit / margin | $228.3 million / 34.9% | $315.9 million / 42.6% |
| Operating income (loss) / margin | ($78.5) million / (12.0%) | $60.8 million / 8.2% |
| Net income (loss) | ($78.7) million | $34.5 million |
| Diluted earnings (loss) per share | ($1.82) | $0.75 |
| Operating cash flow | ($14.3) million | $37.0 million |
| Capital expenditures | $8.1 million | $9.4 million |
Net sales fell 11.7%. U.S. Retail sales declined 14.9% to $320.7 million; U.S. Wholesale fell 8.4% to $252.1 million; International declined 7.9% to $81.6 million. E-commerce grew, but did not offset store closures and weaker demand. Royalty income was $7.3 million, down 14.1%.
Gross margin contracted 770 basis points, primarily reflecting $48.7 million of incremental inventory-related charges, including $22.8 million for adverse inventory and fabric purchase commitments. SG&A was $269.8 million, up 2.3%; as a share of sales it increased 560 basis points to 41.2%. Results also included $17.7 million of goodwill impairment and $26.5 million of tradename impairments. The income tax benefit was $13.0 million; the effective tax rate was 14.2%.
Financial position and liquidity
At March 28, 2020, cash and cash equivalents were $759.1 million, versus $160.1 million a year earlier. Long-term debt, net, was $1.239 billion, including $744.0 million drawn on the revolving credit facility and $494.8 million of senior notes, net of issuance costs. The company had approximately $1.0 million of revolver availability and $5.0 million of outstanding letters of credit. Cash less reported debt was approximately $479.7 million. Current assets were $1.590 billion and current liabilities $427.7 million.
Operating cash flow was negative $14.3 million; investing cash flow was negative $8.1 million; financing cash flow was positive $569.6 million, principally reflecting revolving-credit borrowings. The company drew $639.0 million on the revolver in March to bolster liquidity. Senior notes have $500 million principal, bear 5.625% interest, and mature March 15, 2027. The revolver’s weighted-average borrowing rate was 2.32% at quarter-end.
Material changes, outlook, and risks
- COVID-19 led to North American store closures in March, lower retail and wholesale demand, extended payment terms from some wholesale customers, and supply-chain and freight disruption. Management said the first-quarter results reflect only part of the impact and were not expected to represent Q2 or full-year 2020 results.
- Management planned to reopen stores based on local conditions, expected some openings in May, and said it could not reliably estimate the pandemic’s duration or financial impact. No specific earnings or revenue guidance was provided.
- Cost actions included furloughs, temporary salary reductions, suspension of merit increases, incentive compensation and 401(k) matching, lower inventory commitments, and rent-deferral discussions. Management estimated these measures would reduce remaining-year compensation expense by approximately $100 million.
- Planned 2020 capital expenditures were reduced from approximately $75 million to $30 million. Management said available and anticipated liquidity sources were expected to fund requirements for at least twelve months, while noting contingency plans for further cost reductions if conditions deteriorated.
- Although the company was compliant with revolver covenants at March 28, its forecasts indicated potential noncompliance later in 2020. On May 5, it amended the facility, waiving specified financial covenants through year-end 2020 and replacing them temporarily with minimum EBITDA and liquidity tests. Pricing and commitment fees increased. Management expected compliance with the revised requirements through fiscal 2021, subject to its forecasts.
- The company suspended share repurchases on March 26 and its quarterly dividend on May 1. In Q1 it had repurchased $45.3 million of shares and paid $26.3 million in dividends.
- Q1 restructuring charges were $3.9 million; additional fiscal 2020 charges of approximately $8–$10 million were expected. Recorded legal proceedings were not considered material by management. The filing identifies risks involving prolonged store closures, weak consumer demand, customer credit, supplier and distribution disruption, lease obligations, covenant compliance, and further asset impairments.
Important facts for investors to verify
- Subsequent sales, store reopening progress, e-commerce trends, and recovery in wholesale demand.
- Cash burn, revolver usage and availability, and compliance with the amended facility’s EBITDA and minimum-liquidity tests.
- Inventory levels, purchase commitments, customer collections, and any additional impairment or restructuring charges.
- Whether planned $30 million capital spending and the estimated $100 million compensation savings were achieved; timing of any dividend or buyback resumption.