Business context and reporting period
Carter’s, Inc. designs, sources and markets children’s apparel under Carter’s, OshKosh and other brands through wholesale, retail stores and eCommerce. This 10-Q reports the unaudited fiscal quarter and first three fiscal quarters ended October 1, 2016, compared with periods ended October 3, 2015. The request metadata says 2015 Q3, but the filing itself is for 2016 Q3.
At quarter-end, the company operated 1,059 stores: 636 Carter’s U.S., 267 OshKosh U.S. and 156 in Canada.
Financial performance and position
Amounts are in millions of dollars except per-share data.
| Metric | Fiscal quarter | First three quarters |
|---|---|---|
| Net sales | $901.4; +6.1% | $2,265.0; +5.5% |
| Gross profit / margin | $375.5 / 41.7% | $968.7 / 42.8% |
| Operating income / margin | $130.9 / 14.5% | $287.1 / 12.7% |
| Net income | $80.8; +1.9% | $171.0; +3.5% |
| Diluted EPS | $1.60, versus $1.51 | $3.34, versus $3.12 |
Quarterly gross margin improved 0.8 percentage points year over year, mainly from favorable product costs, partly offset by retail promotions. Operating margin declined 0.8 points as SG&A rose faster than sales; year-to-date operating margin declined 0.2 points. SG&A increased 11.0% in the quarter and 9.6% year to date.
Operating cash flow was $116.6 million year to date, down from $146.0 million, reflecting unfavorable working-capital timing. Capital expenditures were $71.2 million; operating cash flow less capital expenditures was approximately $45.4 million. Cash and equivalents were $140.6 million at October 1, down from $381.2 million at January 2, 2016. The company attributed the cash use principally to financing activity, including $239.1 million of share repurchases and $50.1 million of dividends year to date.
Long-term debt, net, was $580.6 million, including $400 million principal amount of 5.25% senior notes due August 2021 and $185.4 million outstanding on the revolving facility. Approximately $309.7 million remained available under the facility, excluding $4.8 million of letters of credit; the company reported compliance with its covenants. Current assets were $1,045.3 million and current liabilities $282.1 million.
Material changes versus comparable periods
- Sales grew across segments except OshKosh Wholesale. International sales rose 12.5% in the quarter and 11.5% year to date; OshKosh Wholesale sales fell 7.0% and 21.1%, respectively.
- U.S. retail comparable sales increased 2.1% for Carter’s and 4.1% for OshKosh in the quarter, supported by eCommerce growth of 25.2% and 34.8%. Comparable physical-store sales declined 4.1% and 3.0%, respectively.
- New stores and eCommerce contributed to retail sales growth, while store comparable sales declined. OshKosh Retail recorded a $0.6 million year-to-date operating loss versus $3.4 million of operating income in the prior-year period.
- Share repurchases increased to $239.1 million from $78.3 million year to date. The company repurchased 2.36 million shares and had approximately $335.7 million remaining under its authorizations.
Outlook, commentary and risks
- Management expected full-year 2016 capital expenditures of approximately $105 million and estimated a full-year effective tax rate of approximately 35.2%. The filing does not provide a clear quantified full-year sales or earnings forecast.
- Management said cash on hand, operating cash flow and available revolver borrowings should fund foreseeable requirements. Results are seasonal and interim performance may not indicate full-year results.
- Management cited lower demand for seasonal products, fewer store transactions, lower average price per unit, promotional activity and U.S. dollar strength as factors affecting comparable sales. Foreign exchange also affected international revenue and results.
- Unrecognized tax benefits were approximately $10.1 million; $1.2 million of related reserves were expected to be subject to statute expiration within the next fiscal year. Management reported no legal proceedings expected to have a material adverse impact.
- The company completed replacement of a financial information system at the start of Q3; testing was ongoing and expected to finish in Q4. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting from the system replacement to date.
- Management expected the new lease standard, effective for the company in fiscal 2019, to result in material right-of-use assets and lease liabilities. Other disclosed pending accounting changes were not expected to have a material impact, or were still under evaluation.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing is for the quarter ended October 1, 2016, not 2015 Q3.
- Track whether eCommerce growth and new-store contributions continue to offset declining U.S. comparable physical-store sales, particularly in OshKosh Retail.
- Monitor SG&A growth, retail segment margins, working-capital needs and the seasonal build in receivables and inventory.
- Assess cash generation against planned capital expenditures, dividends and repurchases, alongside the company’s debt and revolver availability.
- Review subsequent disclosures on foreign-exchange exposure, tax reserves, financial-system testing and adoption of new accounting standards.