Carter’s, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended December 31, 2016, not a 2015 Q4 filing. Fiscal 2016 and fiscal 2015 each had 52 weeks. The filing also presents unaudited fourth-quarter results for fiscal 2016.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel under the Carter’s and OshKosh brands, selling through company-operated stores and e-commerce, wholesale partners, licensing, and international channels. At year-end, it operated 956 retail locations in the U.S. and Canada and sold through approximately 18,000 wholesale locations. Starting in fiscal 2017, management combined its U.S. retail and wholesale segments, leaving three reportable segments: U.S. Retail, U.S. Wholesale, and International.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $3,199.2 million | $3,013.9 million | +6.1% |
| Gross profit / margin | $1,379.1 million / 43.1% | $1,258.0 million / 41.7% | Margin +1.4 percentage points |
| Operating income / margin | $426.6 million / 13.3% | $392.9 million / 13.0% | Income +8.6% |
| Net income | $258.1 million | $237.8 million | +8.5% |
| Diluted EPS | $5.08 | $4.50 | +12.9% |
| Cash from operations | $369.2 million | $308.0 million | +19.9% |
| Capital expenditures | $88.6 million | $103.5 million | Down $14.9 million |
Operating cash flow less capital expenditures was approximately $280.7 million in fiscal 2016, versus $204.5 million in fiscal 2015. This is a simple cash-flow comparison, not a company-reported free-cash-flow measure.
At December 31, 2016, cash and cash equivalents were $299.4 million, working capital was $779.5 million, and total assets were $1.95 billion. Long-term debt had a $580.4 million carrying value; outstanding principal was approximately $585.0 million, including $400 million of 5.25% senior notes due in 2021 and approximately $185 million drawn under the revolving facility. The facility had $310.2 million of undrawn availability after letters of credit. The company reported compliance with its financial debt covenants.
Fiscal 2016 financing cash outflows included $300.4 million of share repurchases and $66.4 million of dividends. The annual dividend was $1.32 per share, up from $0.88 in 2015. The board subsequently authorized a quarterly dividend of $0.37 per share.
Material changes versus the prior comparable year
- Sales grew across Carter’s retail, Carter’s wholesale, OshKosh retail, and International; OshKosh wholesale sales fell 24.3% to $49.7 million, mainly on lower seasonal bookings and units shipped.
- U.S. retail comparable sales increased 3.1% at Carter’s and 3.3% at OshKosh overall, despite store comparable-sales declines of 1.7% and 2.6%, respectively. E-commerce comparable sales rose 20.4% and 25.3%.
- Gross margin improved on favorable product costs and channel mix. SG&A rose 9.5% to $995.4 million, and increased as a share of sales from 30.2% to 31.1%, reflecting store expansion and higher e-commerce, marketing, technology, and distribution costs.
- International sales increased 11.8% to $364.7 million; currency movements reduced reported consolidated sales by approximately $7.1 million. International operating income increased 25.9%.
- Cash declined from $381.2 million to $299.4 million, largely reflecting increased share repurchases and dividends. Inventory increased 3.8% to $487.6 million.
Outlook, commentary, risks, and unusual items
- Management said cash from operations, cash on hand, and revolving-credit availability should fund working capital and capital needs for the foreseeable future, while noting there is no assurance. Planned fiscal 2017 capital expenditures were approximately $100 million.
- Management projected approximately 77 store openings and 13 closings in fiscal 2017, including continued conversion of stand-alone U.S. stores to dual-branded formats. No specific fiscal 2017 revenue or earnings guidance is provided in the supplied filing text.
- On February 22, 2017, the company acquired Skip Hop for $140 million cash, subject to a working-capital adjustment, plus up to $10 million contingent on fiscal 2017 targets.
- Key risks include dependence on major wholesale customers and concentrated suppliers; consumer demand, promotional pricing, and inventory forecasting; foreign sourcing and transportation disruptions; currency exposure; competition; store leases and e-commerce execution; data security; and substantial lease commitments. The top six wholesale customers represented approximately 25% of fiscal 2016 sales, while ten vendors supplied approximately 62% of products.
- Operating leases totaled $1.11 billion in undiscounted future minimum commitments. Separately, estimated cancellable inventory purchase commitments were $300–$400 million.
- The company reported no goodwill or indefinite-lived tradename impairment at year-end. It disclosed ongoing potential legal claims and continuing costs related to historical SEC and U.S. Attorney’s Office investigations; it said it was not currently party to proceedings believed likely to have a material adverse financial effect.
- Fiscal 2016 included $2.4 million of acquisition-related costs and $0.7 million for a direct-sourcing initiative. Foreign-currency items contributed to a $4.0 million net other expense, compared with $1.9 million of net other income in 2015.
Important facts for investors to verify
- Confirm the requested period: the filing covers FY 2016, while the request metadata says 2015 Q4.
- Review whether retail growth and e-commerce gains can offset store comparable-sales weakness, promotional pressure, and continued store-expansion costs.
- Track OshKosh wholesale trends, inventory levels, and the sustainability of gross-margin improvement.
- Assess the impact and financing of the Skip Hop acquisition, planned fiscal 2017 capital spending, and shareholder returns on liquidity and leverage.
- Monitor customer and supplier concentration, currency effects, lease obligations, and covenant headroom.
- Check subsequent results and disclosures for acquisition performance, segment reporting changes, legal developments, and execution of the company’s direct-sourcing and digital initiatives.