Carter’s, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and first three fiscal quarters ended September 29, 2018. The request metadata says “2017 Q3,” but the filing itself is for 2018 Q3; comparisons below are against the corresponding 2017 periods.
Business context
Carter’s designs, sources, and markets children’s apparel and related products under Carter’s, OshKosh, Skip Hop, and other brands through wholesale, retail, eCommerce, and licensing channels. It operated 1,061 stores in the U.S., Canada, and Mexico at quarter-end.
Key financial metrics
| Metric | Fiscal quarter | Three fiscal quarters |
|---|---|---|
| Net sales | $923.9 million, down 2.5% | $2,375.9 million, up 0.1% |
| Gross profit / margin | $387.5 million / 41.9%, versus $403.6 million / 42.6% | $1,029.9 million / 43.3%, versus $1,022.5 million / 43.1% |
| Operating income / margin | $103.6 million / 11.2%, versus $130.4 million / 13.8% | $220.8 million / 9.3%, versus $273.2 million / 11.5% |
| Net income | $71.8 million, down 12.8% | $151.5 million, down 9.1% |
| Diluted EPS | $1.53, versus $1.71 | $3.20, versus $3.42 |
| Operating cash flow | Not separately presented | $21.4 million, versus $117.5 million |
For the quarter, SG&A rose 3.8% to $294.1 million and increased to 31.8% of sales from 29.9%. Nine-month interest expense was $25.8 million, versus $22.4 million. Effective tax rates were 23.5% for the quarter and 22.3% for the nine months, compared with 33.2% and 34.0%, respectively.
At September 29, cash was $123.9 million, inventory $693.0 million, total assets $2,197.9 million, and total liabilities $1,386.8 million. Long-term debt, net, was $798.0 million, comprising $401.0 million of revolving borrowings and $397.0 million of senior notes, net. The company reported $344.5 million available under its revolving facility and compliance with its covenants. Quarterly and year-to-date dividends were $0.45 and $1.35 per share.
Material changes and operating performance
- Quarterly sales fell primarily because U.S. Wholesale sales declined 8.3% to $339.0 million; U.S. Retail rose 1.2% to $459.1 million and International rose 1.0% to $125.8 million. Nine-month U.S. Wholesale sales fell 5.7%, while U.S. Retail rose 3.0% and International rose 6.4%.
- Quarterly gross margin declined amid higher inventory provisions, lower sales, and weaker price realization. Nine-month gross margin improved slightly, mainly from favorable product costs, partly offset by higher inventory provisions.
- Quarterly operating income fell 20.6%; nine-month operating income fell 19.2%. Higher SG&A, including eCommerce fulfillment, distribution and freight, marketing, and receivables provisions, pressured results.
- A customer bankruptcy contributed $12.8 million of nine-month expense, including a higher receivables provision, and reduced U.S. Wholesale performance.
- International results included about $3.5 million of costs related to changes in the China business model, including inventory and severance charges. China sales declined.
- Nine-month operating cash flow fell to $21.4 million, primarily from working-capital changes and lower net income; inventory increases were a significant cash use. Share repurchases totaled $145.5 million, and dividends paid were $63.1 million.
Outlook, risks, and unusual items
- Management estimated a fiscal 2018 effective tax rate of approximately 22.0% and planned approximately $75 million of full-year capital expenditures. The filing provides no specific full-year sales or earnings guidance.
- Management said cash, operating cash flow, and available revolver capacity, together with access to capital markets, were expected to meet foreseeable cash needs. Results are seasonal and interim performance may not indicate full-year results.
- The company said tariffs imposed in 2018 on certain China imports had not materially affected results through Q3, but it was monitoring potential additional tariffs. A 1 percentage-point change in the rate on variable-rate borrowings would change annual pre-tax interest expense by approximately $4.0 million.
- The revolving facility was extended to September 21, 2023. It had $401.0 million outstanding at a weighted-average rate of 3.58%; the $400 million senior notes carry a 5.25% fixed rate and mature August 15, 2021.
- Adoption of the new lease standard in fiscal 2019 was expected to materially increase reported assets and liabilities; the company could not yet quantify the impact, and did not expect a material effect on earnings or cash flows.
- The company reported no legal proceedings believed to have a material adverse effect and no material changes to previously disclosed risk factors. It adopted ASC 606 retrospectively; disclosed historical impacts were generally small.
Important facts for investors to verify
- Confirm the reporting-year discrepancy: the filing is for the quarter ended September 29, 2018, despite the request metadata’s 2017 Q3 label.
- Track whether wholesale demand and customer credit quality stabilize, and assess the continuing impact of the customer bankruptcy.
- Monitor inventory levels, provisions, pricing, and cash conversion given the inventory build and sharp decline in operating cash flow.
- Assess progress and costs from the China business-model changes, as well as exposure to tariffs, currency movements, and variable interest rates.
- Evaluate the sustainability of buybacks and dividends alongside debt levels, facility availability, and upcoming lease-accounting balance-sheet changes.