Carter’s, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 28, 2019 (52 weeks), compared with the fiscal year ended December 29, 2018 (also 52 weeks). Although the request specifies “2018 Q4,” the filing is the 2019 Form 10-K; it also reports unaudited fourth-quarter results for both 2019 and 2018.
Business context and reporting period
Carter’s designs, sources, and sells children’s apparel and related products under the Carter’s, OshKosh B’gosh, and Skip Hop brands. It operates through U.S. Retail, U.S. Wholesale, and International segments, using company stores and eCommerce, wholesale partners, and licensees. At year-end it had 1,109 retail stores and approximately 18,000 wholesale locations. The company reported its 31st consecutive year of sales growth.
Financial performance and key metrics
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $3.519 billion | $3.462 billion | +1.6% |
| Gross profit | $1.509 billion | $1.497 billion | +0.7% |
| Gross margin | 42.9% | 43.3% | -40 bps |
| Operating income | $371.9 million | $391.4 million | -5.0% |
| Operating margin | 10.6% | 11.3% | -70 bps |
| Net income | $263.8 million | $282.1 million | -6.5% |
| Diluted EPS | $5.85 | $6.00 | -2.5% |
| Operating cash flow | $387.2 million | $356.2 million | +$31.0 million |
| Capital expenditures | $61.4 million | $63.8 million | -$2.4 million |
FY 2019 segment sales: U.S. Retail $1.884 billion (+1.8%); U.S. Wholesale $1.206 billion (+2.1%); International $429.5 million (-0.2%). U.S. Retail comparable sales, including eCommerce, rose 0.4%; growth was driven by eCommerce while comparable store sales weakened.
Fourth quarter: Net sales were $1.101 billion versus $1.086 billion in Q4 2018. Gross profit was $467.5 million versus $467.6 million; operating income was $162.8 million versus $170.6 million; net income was $125.1 million versus $130.6 million; diluted EPS was $2.82 versus $2.83.
Year-end liquidity and debt: Cash and cash equivalents were $214.3 million; working capital was $632.3 million. Debt was $600.0 million principal ($594.7 million net of issuance costs), including $500 million of 5.625% senior notes due 2027 and $100 million drawn on the revolving facility. Revolver availability was $645 million, after letters of credit. The company reported compliance with its credit covenants.
Operating lease assets of $687.0 million and lease liabilities of $824.6 million were recognized in 2019 following adoption of the new lease accounting standard. The standard materially affected the balance sheet but did not materially affect the income statement or cash flow statement.
Material changes versus the prior comparable period
- Sales increased modestly, led by U.S. Retail eCommerce and U.S. Wholesale growth; International sales were nearly flat, including an approximately $6.1 million adverse currency translation effect.
- Gross margin declined amid higher product costs, China-related tariffs, less favorable U.S. Wholesale customer and product mix, and higher eCommerce shipping costs. Higher average selling prices and favorable inventory provisions partly offset these pressures.
- Operating income included a $30.8 million non-cash impairment charge for the Skip Hop tradename. The impairment reflected lower demand, the loss of Toys “R” Us as a significant customer, weaker international demand, and tariffs on China-sourced products.
- Net income also reflected a $7.8 million loss on extinguishment of debt. Carter’s redeemed $400 million of 5.25% notes due 2021 and issued $500 million of 5.625% notes due 2027.
- Cash returned to shareholders totaled $286.5 million: $196.9 million in share repurchases and $89.6 million in dividends. The quarterly dividend rose from $0.45 per share in 2018 to $0.50 in 2019; the board authorized $0.60 per share for payment in March 2020.
- U.S. Wholesale operating income fell 5.2%, while U.S. Retail operating income increased 0.5%. International operating income decreased 6.6%, including its allocated share of the Skip Hop impairment.
Outlook, risks, contingencies, and unusual items
- Management planned approximately $75 million of capital expenditures in fiscal 2020, primarily for store openings and remodels, technology, and distribution facilities. It stated that cash, operating cash flow, and revolver availability should cover foreseeable needs; no full-year earnings or sales guidance is provided in the supplied filing text.
- The company was monitoring the novel coronavirus outbreak and related factory and shipping delays. It expected to source approximately 15% of products from China in 2020, while suppliers elsewhere in Asia also sourced significant fabric from China; the financial impact of delays was unknown.
- Supply is concentrated: approximately 65% of fiscal 2019 products came from ten vendors, with about half from three. Wholesale exposure is also notable: the top ten wholesale customers represented approximately 33% of sales, and the ten largest customers held approximately 85% of gross receivables at year-end.
- Other principal risks include consumer spending and fashion trends, markdown and inventory risk, tariffs and sourcing disruption, foreign exchange and interest-rate exposure, competition, store and eCommerce execution, data security, and customer credit risk. Unseasonable weather and seasonal concentration can also affect results.
- Contractual obligations included $941.9 million of undiscounted operating lease payments and $223.9 million of scheduled debt interest. Inventory purchase commitments, excluded from that table, were estimated at $300–$400 million and were generally cancellable, subject to potential charges.
- The filing reports no legal proceedings believed likely to have a material adverse effect. It also describes historic SEC and U.S. Attorney investigations concerning customer margin support; the SEC entered into a non-prosecution agreement with the company in 2010, subject to continued cooperation, and related legal and indemnification costs may continue.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The Skip Hop tradename impairment assessment was identified as a critical audit matter; the remaining $26.0 million tradename balance is at risk if projections or market conditions worsen.
Important facts for investors to verify
- Whether U.S. Retail eCommerce growth can offset weaker store traffic and store closures, and whether comparable sales and segment margins improve.
- Whether Skip Hop sales and profitability recover, and whether its remaining $26.0 million tradename value requires further impairment.
- The effects of China tariffs, coronavirus-related sourcing and shipping disruption, and vendor concentration on product costs, availability, and margins.
- Wholesale customer credit quality and collections, given the concentration of sales and receivables among major accounts.
- Debt service, refinancing terms, covenant headroom, and the sustainability of dividends and repurchases alongside planned capital spending.
- The effect of lease obligations and the new lease accounting presentation when comparing 2019 balance-sheet measures with prior periods.