Carter’s, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the first quarter of fiscal 2011, ended April 2, 2011—not 2010 Q1 as stated in the request metadata. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel under Carter’s, OshKosh and related brands through wholesale, mass-channel, retail-store, eCommerce, and licensing businesses. At quarter-end, it operated 316 Carter’s stores and 179 OshKosh stores. The unaudited quarter is compared with the three months ended April 3, 2010.
Key financial metrics and changes
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $469.0 million | $409.0 million | Up 14.7% |
| Gross profit / margin | $157.8 million / 33.6% | $166.8 million / 40.8% | Profit down 5.4%; margin down 720 bps |
| Operating income / margin | $53.6 million / 11.4% | $71.2 million / 17.4% | Down 24.6% |
| Net income | $32.1 million | $42.8 million | Down 25.0% |
| Diluted EPS | $0.55 | $0.71 | Down $0.16 |
| Operating cash flow | $9.3 million | $23.4 million | Down $14.1 million |
Sales mix: Carter’s wholesale sales rose 28.5% to $187.9 million and Carter’s retail sales rose 16.7% to $137.9 million. Carter’s mass-channel sales declined 1.9% to $66.6 million. OshKosh sales were broadly flat at $76.6 million; OshKosh retail comparable sales fell 9.8%. Carter’s retail comparable sales increased 1.2%.
Balance sheet and liquidity at April 2, 2011: Cash and cash equivalents were $248.9 million; current assets $672.7 million and current liabilities $102.7 million. Long-term debt was $236.0 million, with no current maturities reported. The company had a $375 million revolving facility, approximately $130 million available after outstanding letters of credit, and reported covenant compliance. Total liabilities were $498.0 million.
Cash increased $1.5 million during the quarter. Capital expenditures were $6.8 million. Inventory was $217.5 million, up 51.9% from April 3, 2010; management attributed the increase to higher product costs and forecast growth. Accounts receivable was $160.1 million, up from $118.9 million a year earlier. The filing does not provide a clear standalone free-cash-flow figure.
Outlook, management commentary, risks, and unusual items
- Management expected higher product costs to continue pressuring profitability and operating cash flow through at least fiscal 2011. Cotton, labor, freight, and foreign-currency effects were cited; planned price increases were not expected to offset all cost increases in the near term.
- No formal full-year earnings or revenue guidance is provided. The company planned approximately $50 million of FY2011 capital expenditures, 55 Carter’s store openings and four closures, and four OshKosh openings and three closures. Management noted that historically about 57% of annual sales occurred in the second half, so first-half results may not indicate full-year performance.
- Gross profit was pressured by approximately $28 million of higher product costs and $3.4 million of excess-inventory provisions. SG&A increased in dollars but declined as a percentage of sales, partly reflecting lower performance-based compensation provisions.
- Variable-rate debt was $236.0 million; management estimated a 1 percentage-point rate change would alter annual interest cost by approximately $2.4 million.
- Litigation and investigations remain relevant: a federal shareholder class action was dismissed without prejudice in March 2011, with plaintiffs permitted to amend by May 16, 2011; the company said it would defend any amended claims. The SEC had agreed not to charge the company or seek penalties under a non-prosecution agreement conditioned on continued cooperation. A related U.S. Attorney’s Office investigation and a shareholder derivative case were also disclosed.
- Other stated risks include customer concentration (top eight customers represented about 38% of quarterly sales), competitive pricing and consumer demand, foreign sourcing and supplier concentration (one sourcing agent managed about 90% of inventory purchases), product quality, and possible costs from litigation or purchase-order cancellations.
Important facts for investors to verify
- Whether elevated cotton, labor, freight, and currency costs continue to erode gross margin, and whether price increases are accepted without weakening demand.
- Whether operating cash flow improves as working-capital movements normalize and inventory is converted to sales.
- OshKosh retail performance and the profitability of store expansion, including the planned openings and capital spending.
- Revolver availability, covenant headroom, variable-rate exposure, and the terms and maturity of the credit facility.
- Developments in the shareholder litigation and government investigations, including any amended complaint and associated costs.