Carter’s, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the fiscal quarter ended April 1, 2017 (first quarter of fiscal 2017), not 2016 Q1. Amounts below are in U.S. dollars unless noted.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel and related products through wholesale, retail stores, and eCommerce. It operated 965 retail stores at quarter-end. The company acquired Skip Hop on February 22, 2017; its results are included from February 23. Management reorganized U.S. reporting into U.S. Retail and U.S. Wholesale segments, with prior periods conformed.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $732.8 million | $724.1 million | +1.2% |
| Gross profit / margin | $315.8 million / 43.1% | $310.9 million / 42.9% | Profit +1.6%; margin +0.2 points |
| Operating income / margin | $78.6 million / 10.7% | $93.0 million / 12.8% | Income -15.5% |
| Net income | $46.7 million | $54.0 million | -13.6% |
| Diluted EPS | $0.95 | $1.04 | -8.7% |
| Operating cash flow | $84.2 million | $128.3 million | Down $44.1 million |
Gross margin improvement reflected a shift toward higher-margin retail sales, lower inventory charges, and lower product costs. Higher SG&A—up 8.2% to $247.8 million and rising from 31.6% to 33.8% of sales—more than offset that benefit, reducing operating income.
- Segment sales: U.S. Wholesale $292.6 million (+0.2%); U.S. Retail $363.8 million (+2.7%); International $76.4 million (-1.9%).
- Segment operating income: U.S. Wholesale $69.7 million (margin 23.8%, versus 23.4%); U.S. Retail $29.9 million (8.2%, versus 11.1%); International $3.7 million (4.8%, versus 10.8%).
- Comparable sales: U.S. Retail total -3.5%, with stores -10.4% and eCommerce +19.9%. Canada total retail comparable sales fell 8.0%, as eCommerce growth of 40.1% was outweighed by store declines of 11.7%.
- Cash and liquidity: Cash was $154.3 million at April 1, down from $299.4 million at December 31, 2016. Current assets were $841.9 million and current liabilities $225.0 million.
- Debt: Long-term debt, net, was $581.6 million, including $400 million of 5.25% senior notes due August 2021 and $186 million drawn on the revolving facility. Approximately $309.2 million of revolver capacity remained available; the company reported covenant compliance.
- Capital returns: The company repurchased 543,944 shares for $46.6 million and paid dividends of $0.37 per share. Remaining repurchase authorization was approximately $227.8 million.
Material changes, outlook, risks, and unusual items
- Skip Hop contributed approximately $10.4 million of sales and $0.3 million of operating income after acquisition through quarter-end. The acquisition cost $143.7 million net of cash acquired. The preliminary purchase allocation included $56.6 million of goodwill and $92.7 million of intangible assets; up to $10 million of additional consideration may be payable based on 2017 targets. The purchase-price allocation remains subject to revision.
- Operating cash flow declined amid lower net income and less favorable working-capital changes. Investing cash outflow included the Skip Hop acquisition; capital expenditures were $18.0 million.
- Management estimated approximately $90 million of capital expenditures for fiscal 2017 and an approximately 35% full-year effective tax rate. It projected about 60 U.S. store openings and 12 closings, and 16 Canadian openings and two closings for the year. No full-year sales or earnings guidance is provided in the supplied filing text.
- Management attributed weak store comps partly to delayed income-tax refunds and Easter shifting into Q2. Results are seasonal, and interim results may not indicate full-year performance. Management expects cash, operating cash flow, and available revolver capacity to meet foreseeable needs.
- Key pressures included higher retail and eCommerce operating costs, expansion costs, lower International profitability, and reduced royalty income. Foreign-exchange fluctuations and variable-rate debt are identified risks; a 1 percentage-point rate change on quarter-end variable-rate borrowings would change annual pretax interest expense by about $1.9 million.
- Potentially favorable items include about $1.0 million of Q1 tax benefit from newly adopted share-based payment accounting guidance. The filing reports no legal proceedings believed to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether eCommerce growth can offset weak comparable store sales, particularly in U.S. Retail and Canada.
- Whether higher SG&A and new-store/eCommerce investment translate into improved operating margins.
- Skip Hop’s integration, performance against its contingent-payment targets, and final purchase-price allocation.
- Working-capital and operating cash-flow trends, planned capital spending, and the sustainability of dividends and repurchases.
- Compliance with debt covenants, revolver availability, and exposure to interest-rate and currency movements.