Carter’s, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended June 30, 2012. The request metadata says “2011 Q2,” but the filing is for 2012 Q2.
Business context
Carter’s designs and markets children’s apparel under Carter’s, OshKosh and other brands through wholesale, retail, eCommerce and licensing channels. At quarter-end it operated 385 Carter’s, 166 OshKosh and 73 Canadian stores. Results include the Canadian Bonnie Togs business acquired on June 30, 2011; the prior-year comparison includes little operating contribution from that acquisition, so reported growth is not fully comparable.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $472.2 million | $394.5 million | $1,023.8 million | $863.5 million |
| Gross profit / margin | $183.2 million / 38.8% | $135.0 million / 34.2% | $378.0 million / 36.9% | $293.1 million / 33.9% |
| Operating income / margin | $34.4 million / 7.3% | $22.0 million / 5.6% | $88.2 million / 8.6% | $75.7 million / 8.8% |
| Net income | $20.8 million | $12.7 million | $53.1 million | $44.8 million |
| Diluted EPS | $0.35 | $0.22 | $0.89 | $0.76 |
Quarterly sales rose 19.7% and net income rose 64.3%; first-half sales rose 18.6% and net income rose 18.5%. Higher prices and growth in direct-to-consumer channels supported gross-margin expansion. Product costs nevertheless increased approximately $8 million in Q2 and $45 million in the first half, principally from cotton and labor. First-half operating margin eased 0.2 percentage point as SG&A grew faster than sales.
By segment, Q2 Carter’s wholesale sales increased 12.7%, Carter’s retail increased 18.4%, OshKosh retail increased 2.1%, OshKosh wholesale declined 13.0%, and international sales increased to $37.3 million, principally reflecting the Canadian acquisition. OshKosh retail remained loss-making, with a Q2 segment operating loss of $9.3 million.
Cash, debt and liquidity
- First-half operating cash flow was $89.9 million, versus cash use of $86.3 million in the prior-year period, primarily reflecting improved working capital and higher earnings.
- First-half capital expenditures were $37.7 million, compared with $16.1 million. Management planned approximately $90–$100 million of fiscal 2012 capital expenditures, chiefly for stores, remodels and distribution capacity.
- Cash at June 30 was $237.6 million; long-term revolving-credit borrowings were $186.0 million, down from $236.0 million at December 31, 2011. The company repaid $50.0 million net on the revolver during Q2. Outstanding letters of credit were $13.3 million; the reported effective borrowing rate was 2.50% at quarter-end.
- Management said cash, operating cash flow and facility availability should fund working-capital and capital needs for the foreseeable future, while noting this is not assured. The company reported compliance with debt covenants. A 1 percentage-point rate change would alter annual interest cost by about $1.9 million.
- Cash dividends were not anticipated in the foreseeable future; credit-facility restrictions limit upstream dividends absent specified conditions.
Outlook, unusual items and risks
- Management expected product costs to decline in the second half versus the prior-year second half, but remain elevated. Price competition may constrain the ability to pass costs through to customers.
- Fiscal 2012 store plans were approximately 63 Carter’s openings and 7 closures; 7 OshKosh openings and 13 closures; and 18 Canadian openings with no planned closures.
- The Hogansville, Georgia distribution facility was planned to close in 2013, with a larger Braselton facility to be added. Closure costs were $1.8 million in the first half; additional charges were estimated at $3.5 million across fiscal 2012–2013. About $1.4 million of restructuring reserves remained at quarter-end.
- Bonnie Togs contingent consideration was valued at $27.3 million at June 30, based on management’s high probability estimate that earnings targets will be met. It is a Level 3 fair-value estimate and will be remeasured; changes in assumptions could materially affect the liability.
- Principal disclosed risks include customer concentration (top seven customers generated 32% of Q2 sales and 34% of first-half sales), consumer demand and fashion shifts, input-cost and currency exposure, foreign sourcing and vendor dependence, eCommerce transition and execution, competition, and possible impairment of goodwill or trademarks.
- A previously disclosed shareholder class action settlement received final court approval on June 1, 2012; insurers paid the settlement. The company reported no other pending legal matter it believed would materially affect its financial position, results or cash flows. It also disclosed ongoing costs and uncertainty related to investigations and litigation stemming from prior restatements.
Important facts for investors to verify
- Separate organic performance from acquisition-related growth, particularly for international sales and store counts.
- Track whether gross-margin gains persist as product costs remain elevated and whether SG&A growth moderates.
- Monitor OshKosh retail losses, comparable-store traffic trends, and the planned store openings and closures.
- Assess operating cash conversion, seasonal inventory requirements, and execution of the $90–$100 million capital-spending plan.
- Review the contingent consideration assumptions, remaining distribution-center closure costs, and debt-covenant headroom.