Carter’s, Inc. — Form 10-K Summary
Period: Fiscal year ended December 30, 2017 (52 weeks), with quarterly data for fiscal Q4. The request metadata says “2016 Q4,” but the supplied filing is the fiscal 2017 Form 10-K; comparisons below use fiscal 2016.
Business context
Carter’s designs, sources, and sells children’s apparel and accessories under Carter’s, OshKosh, and Skip Hop brands through retail, e-commerce, wholesale, and licensing channels. Fiscal 2017 reportable segments were U.S. Retail, U.S. Wholesale, and International. The company acquired Skip Hop in February 2017 and its Mexican licensee in August 2017.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $3,400.4 million | $3,199.2 million |
| Gross profit / margin | $1,483.3 million / 43.6% | $1,379.1 million / 43.1% |
| Operating income / margin | $419.6 million / 12.3% | $426.6 million / 13.3% |
| Net income | $302.8 million | $258.1 million |
| Diluted EPS | $6.24 | $5.08 |
| Operating cash flow | $329.6 million | $369.2 million |
- FY 2017 sales grew 6.3%. Segment sales: U.S. Retail $1,775.3 million (+7.2%), U.S. Wholesale $1,209.7 million (+2.7%), and International $415.5 million (+13.9%).
- Q4 sales were $1,027.3 million versus $934.2 million; operating income was $145.8 million versus $139.4 million; net income was $135.7 million versus $87.1 million. Q4 results included the $40.0 million tax benefit described below.
- Gross margin improved chiefly on lower product costs and increased e-commerce mix. Operating margin fell as SG&A rose 11.2% to $1,106.9 million, including higher retail, e-commerce, acquisition, and special compensation costs.
- Cash and cash equivalents were $178.5 million, down from $299.4 million. Working capital was $689.0 million, versus $779.5 million. Inventory rose 12.5% to $548.7 million, primarily reflecting acquisitions and business growth.
- Debt was $621.0 million principal ($617.3 million net carrying value); the company had $524.5 million of undrawn revolving availability, after letters of credit. The $400 million senior notes bear 5.25% interest and mature in 2021; the revolving facility matures in 2022. The company reported covenant compliance.
- Investing cash outflow was $227.9 million, including $158.5 million for acquisitions and $69.5 million of capital expenditures. Financing cash outflow was $223.1 million. Dividends paid were $70.9 million and share repurchases totaled $188.8 million.
Material changes and unusual items
- Net income rose 17.3%, while operating income declined 1.6%; the difference was substantially influenced by the lower tax provision.
- The Tax Cuts and Jobs Act generated a provisional $40.0 million FY 2017 tax benefit: a $50.4 million benefit from deferred-tax remeasurement, partly offset by $10.4 million of estimated transition-tax expense. The company’s effective tax rate was 22.6%, compared with 34.8%; tax accounting was incomplete and estimates could be adjusted in fiscal 2018. Management attributed approximately $0.84 of the diluted EPS increase to tax reform.
- Skip Hop contributed approximately $96.3 million in sales from acquisition through year-end. The company also acquired 39 Mexican stores; acquired businesses’ internal controls were excluded from the year-end control assessment.
- Fiscal 2017 included $21.2 million in special employee compensation provisions and $3.4 million in acquisition-related costs. A $3.6 million reversal of Skip Hop contingent consideration reduced SG&A.
- Operating cash flow decreased $39.6 million, primarily due to unfavorable working-capital changes. International operating income declined 21.6%, with segment margin falling from 16.2% to 11.2%.
Outlook, risks, and contingencies
- Management expected cash from operations, cash on hand, and revolver availability to cover working-capital and capital needs for the foreseeable future, while noting there was no assurance. Planned FY 2018 capital expenditures were approximately $115 million.
- FY 2018 store plans included about 50 U.S. openings and 35 closures, plus 11 Canadian and 7 Mexican openings. Management also expected to repatriate portions of foreign cash beginning in FY 2018 and anticipated lower U.S. cash taxes under the new tax law.
- Key risks include wholesale customer concentration (top seven customers represented about 25% of sales; the ten largest represented 71% of gross receivables), reliance on a concentrated supplier base (about 60% of products purchased from ten vendors), competitive and promotional pressure, inventory forecasting, foreign sourcing and currency exposure, store leases, e-commerce and data security, and acquisition integration.
- The filing describes previously disclosed SEC and U.S. Attorney’s Office investigations concerning historical customer margin support. A 2010 SEC non-prosecution agreement was conditioned on continued cooperation; related proceedings may continue to consume management time and incur legal and indemnification costs. The company reported no current legal proceeding it believed would materially adversely affect its financial position, results, or cash flows.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective, excluding the acquired Skip Hop and Carter’s Mexico businesses from its assessment.
Important facts for investors to verify
- How much of EPS growth reflects the one-time tax benefit, and how provisional tax estimates change in FY 2018.
- Whether sales growth and e-commerce gains can offset weaker comparable U.S. store sales (down 3.3%) and lower wholesale unit shipments.
- Whether rising SG&A, inventory, and acquisition integration costs pressure operating margins and cash conversion.
- Debt service, covenant headroom, and planned capital returns relative to operating cash flow and the $115 million FY 2018 capex plan.
- Customer and supplier concentration, receivable reserves, and exposure to the historical investigations and related legal costs.