Carter’s, Inc. — Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended December 31, 2011, not a 2010 Q4 filing. Fiscal 2011 and fiscal 2010 each comprised 52 weeks. Amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Carter’s designs, sources, and sells children’s apparel under Carter’s, OshKosh, and related brands through wholesale, retail, e-commerce, and licensing channels. The company reported five segments: Carter’s wholesale and retail, OshKosh wholesale and retail, and international.
On June 30, 2011, Carter’s acquired Canadian children’s retailer Bonnie Togs for USD $61.2 million cash at closing, subject to post-closing adjustments. Bonnie Togs results were consolidated from July 1, 2011; it contributed $76.6 million in sales and $3.8 million in net income during the year. Carter’s operated 65 Canadian stores at year-end.
Key financial metrics
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net sales | $2,109.7 million | $1,749.3 million |
| Gross profit / margin | $691.2 million / 32.8% | $673.9 million / 38.5% |
| Operating income / margin | $187.5 million / 8.9% | $243.3 million / 13.9% |
| Net income / diluted EPS | $114.0 million / $1.94 | $146.5 million / $2.46 |
| Operating cash flow | $81.1 million | $85.8 million |
| Cash and cash equivalents at year-end | $233.5 million | $247.4 million |
| Total debt at year-end | $236.0 million | $236.0 million |
| Working capital | $629.4 million | $532.9 million |
Capital expenditures were $45.5 million; investing cash outflow was $106.7 million, including $61.2 million for Bonnie Togs. Financing cash flow was positive $11.5 million. Year-end current assets were $782.1 million and current liabilities were $152.8 million.
Material changes versus the prior comparable period
- Sales grew 20.6% ($360.5 million), reflecting growth across segments and the acquisition. International sales rose to $136.2 million from $34.8 million, substantially reflecting six months of Bonnie Togs operations.
- U.S. Carter’s wholesale sales increased 13.4%; Carter’s retail increased 22.9%, including $40.8 million of e-commerce sales and a 5.6% comparable-store increase. OshKosh retail sales rose 6.0%, but comparable-store sales declined 0.3%.
- Gross margin fell 570 basis points to 32.8%. Management attributed the pressure principally to approximately $180 million in higher product costs, including cotton and labor, and $6.7 million of acquired-inventory fair-value step-up amortization. Selective price increases and Canadian volume partly offset the impact.
- Operating income declined 22.9%, and net income declined 22.2%, despite higher sales. SG&A rose 15.5% in dollars but improved to 25.6% of sales from 26.8%.
- Operating cash flow declined modestly year over year and was substantially below fiscal 2009’s $188.9 million. Inventory increased to $347.2 million from $298.5 million, reflecting higher costs, Canadian operations, and retail and e-commerce growth.
- OshKosh segment operating results turned negative: a $11.0 million loss in fiscal 2011 versus $23.2 million of operating income in fiscal 2010. Carter’s segment operating income also declined.
Fourth-quarter information
The filing includes unaudited fiscal 2011 Q4 results, not a standalone 2010 Q4 filing. Q4 2011 sales were $606.6 million versus $495.3 million in Q4 2010; gross profit was $206.7 million versus $184.0 million; operating income was $55.0 million versus $58.8 million; and net income was $34.8 million versus $34.9 million. Diluted EPS was $0.59 versus $0.60.
Outlook, risks, contingencies, and unusual items
- Outlook: No formal earnings or sales guidance is stated. Management expected elevated product costs to pressure profitability and cash flow through at least the first half of fiscal 2012. Planned fiscal 2012 capital expenditures were $90–$100 million. Store plans included approximately 60 Carter’s U.S. openings and four closures, five OshKosh openings and 13 closures, and 18 Canadian openings with no planned closures.
- Liquidity and financing: Management said cash, operating cash flow, and available revolving-credit capacity should fund foreseeable working-capital and capital needs, while noting this is not assured. The amended facility provides a $340 million U.S.-dollar revolver and a $35 million multicurrency facility, maturing October 15, 2015. Borrowings were $236 million, plus $14.9 million of letters of credit; the company reported covenant compliance. A 1% rate change was estimated to affect annual interest cost by about $2.4 million.
- Commitments: Contractual obligations totaled $1.29 billion, including $505.6 million of operating leases and $510.0 million of inventory purchase commitments. The Bonnie Togs contingent-consideration liability was valued at $25.6 million; potential payments depend on earnings targets and may reach CAD $35 million.
- Principal risks: Cotton, labor, fuel, freight, and foreign-exchange costs; intense price competition and consumers’ acceptance of price increases; consumer spending and traffic; reliance on foreign sourcing; and concentration in a sourcing agent managing about 83% of inventory purchases. The top four customers represented approximately 26% of sales, although none individually reached 10%.
- Legal matters: The SEC agreed in December 2010 not to charge the company under a conditional non-prosecution agreement relating to its customer-margin-support investigation; the company said it would continue cooperating with the SEC and the U.S. Attorney’s Office and could not predict the investigation’s outcome or cost. A related securities class-action settlement was paid by insurers, received preliminary court approval, and awaited a final-approval hearing scheduled for May 31, 2012. A shareholder derivative action was dismissed without prejudice in February 2012.
- Other notable items: The year included $6.7 million of acquired-inventory step-up amortization, $3.1 million of acquisition-related expenses, and $2.5 million of contingent-consideration accretion expense. The auditor and management reported effective internal control over financial reporting as of December 31, 2011.
Important facts for investors to verify
- How much of reported sales growth and future performance is attributable to Bonnie Togs versus organic growth, and whether Canadian integration and earnings targets are being achieved.
- Whether pricing, sourcing changes, or other actions can offset elevated input and freight costs without weakening demand or margins.
- Whether inventory growth converts to sales and cash, given the reduced operating cash flow and planned increase in capital expenditures.
- OshKosh’s path back to profitability and the economics of planned store openings and closures.
- Available revolver capacity and covenant headroom after letters of credit, lease obligations, inventory commitments, and contingent consideration.
- Final court approval of the insured class-action settlement and any developments in the continuing government investigation.