Carter’s, Inc. — Form 10-Q Summary
Reporting period: The filing covers the fiscal quarter ended October 3, 2015, and the first three fiscal quarters of fiscal 2015. Each quarter contained 13 weeks. The request metadata says “2014 Q3,” but the filing itself is for 2015 Q3; comparisons below are against the corresponding 2014 periods.
Business context
Carter’s designs, sources, and markets children’s apparel through wholesale, retail, eCommerce, and licensing channels under Carter’s, OshKosh, and related brands. At quarter-end, it operated 577 Carter’s U.S. stores, 232 OshKosh U.S. stores, and 140 stores in Canada.
Key financial results
| Metric | Q3 2015 | Q3 2014 | First 3 quarters 2015 | First 3 quarters 2014 |
|---|---|---|---|---|
| Net sales | $849.8 million | $798.9 million | $2,147.3 million | $2,024.6 million |
| Gross profit / margin | $347.5 million / 40.9% | $321.2 million / 40.2% | $894.5 million / 41.7% | $828.4 million / 40.9% |
| Operating income / margin | $130.2 million / 15.3% | $110.5 million / 13.8% | $276.7 million / 12.9% | $219.3 million / 10.8% |
| Net income | $79.3 million | $65.9 million | $165.2 million | $126.1 million |
| Diluted earnings per share | $1.51 | $1.23 | $3.12 | $2.34 |
| Operating cash flow | Not separately stated | Not separately stated | $146.0 million | $24.9 million |
Q3 sales rose 6.4%, operating income rose 17.9%, and net income rose 20.4%. For the first three quarters, sales increased 6.1%, operating income 26.1%, and net income 31.0%. SG&A was 27.1% of sales in Q3 versus 27.8% a year earlier, and 30.3% year to date versus 31.5%.
- Cash flow and investment: Year-to-date operating cash flow was $146.0 million. Capital expenditures were $77.0 million, compared with $83.6 million a year earlier. Management planned approximately $120 million of capital expenditures for fiscal 2015.
- Liquidity and debt: Cash and cash equivalents were $288.3 million; current assets were $1,118.5 million and current liabilities $278.8 million. Long-term debt totaled $585.3 million, comprising $400 million of 5.25% senior notes due August 2021 and $185.3 million drawn on the revolving facility. The amended $500 million facility had $304.9 million available, excluding $9.9 million of letters of credit. The company reported covenant compliance.
- Capital returns: Year-to-date repurchases were $78.3 million for 795,025 shares; approximately $106.8 million remained authorized. Dividends were $0.22 per share in Q3 and $0.66 year to date, versus $0.19 and $0.57, respectively, in 2014.
Material changes and operating drivers
- Gross margin improved in Q3 and year to date, primarily from margin improvements in domestic wholesale and international operations. Carter’s wholesale benefited from higher demand and shipment timing; lower product costs also supported margins.
- Retail growth was substantially supported by new stores and eCommerce, while comparable retail store sales declined. Q3 U.S. DTC comps were down 3.2% for Carter’s and 2.0% for OshKosh; eCommerce comps grew 6.2% and 14.1%, respectively. Canadian retail comps increased 4.8% in Q3.
- OshKosh wholesale sales fell 25.1% in Q3, reflecting lower off-price sales and seasonal bookings. International sales increased modestly, but currency movements reduced consolidated sales by approximately $12.7 million in Q3 and $23.9 million year to date.
- Operating cash flow improved significantly year over year, driven by higher earnings and favorable working-capital timing, particularly inventory and trade-payable payments; timing of receivable collections partly offset the improvement.
Outlook, commentary, risks, and unusual items
- Management expected a fiscal 2015 effective tax rate of approximately 36% and approximately $120 million in full-year capital expenditures. The filing does not provide a clear numerical full-year sales or earnings forecast and cautions that interim results may not indicate full-year performance.
- Management cited seasonality, a strong U.S. dollar and reduced international tourist demand as pressures on comparable sales. Foreign exchange changes also affected reported international revenue and accumulated other comprehensive loss.
- Variable-rate revolving borrowings were $185.3 million; management estimated a 1 percentage-point rate change would alter annual pretax interest expense by approximately $1.9 million. Foreign-exchange contracts hedge part of Canadian inventory exposure, but are not designated for hedge accounting and can create earnings volatility.
- The company amended and extended its revolving credit facility in September 2015, increasing commitments from $375 million to $500 million and stating that the amendment achieved better pricing and provided additional liquidity. The facility matures September 2020 and includes financial and other restrictive covenants.
- The final approximately $8.6 million Bonnie Togs earn-out payment was made in Q3; no liability remained at quarter-end. A favorable settlement of federal and state tax audits generated approximately $1.8 million of prior-year tax benefits in Q1, reducing the year-to-date effective tax rate relative to 2014.
- The filing reports ordinary-course claims and lawsuits but identifies no legal proceeding expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether wholesale shipment timing and new-store additions are sustainable drivers, given declining U.S. retail store comps and weaker OshKosh wholesale sales.
- How much of the reported sales and earnings growth reflects underlying demand and margin performance versus currency effects, favorable tax-audit settlements, and prior-year expense comparisons.
- Whether working-capital cash-flow gains persist, particularly as receivables and inventory fluctuate seasonally.
- Execution and returns on planned store openings, eCommerce, and approximately $120 million of fiscal 2015 capital expenditures.
- Revolver availability, covenant headroom, variable-rate exposure, and any restrictions on future dividends or share repurchases.