Carter’s, Inc. — Form 10-Q Summary
Period clarification: The filing covers the fiscal quarter ended March 30, 2019, compared with the quarter ended March 31, 2018. This differs from the “2018 Q1” period in the request metadata.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel and related products through wholesale, company-operated stores, eCommerce, and licensing. It operated 1,063 stores in the U.S., Canada, and Mexico at quarter-end. The report is unaudited; management cautions that first-quarter results may not indicate full-year results because of seasonality.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $741.1 million | $755.8 million |
| Gross profit / margin | $315.9 million / 42.6% | $332.5 million / 44.0% |
| Operating income / margin | $60.8 million / 8.2% | $60.3 million / 8.0% |
| Net income | $34.5 million | $42.5 million |
| Diluted EPS | $0.75 | $0.89 |
| Cash from operations | $37.0 million | $64.1 million |
| Capital expenditures | $9.4 million | $14.7 million |
SG&A was $263.7 million, or 35.6% of sales, versus $280.2 million, or 37.1%. Interest expense was $9.6 million versus $8.0 million. Results included a $7.8 million loss on extinguishment of debt. The effective tax rate was 21.2%, compared with 19.7%.
At March 30, 2019, cash was $160.1 million, long-term debt net of issuance costs was $625.3 million, and the revolving facility had $131.0 million drawn, $5.0 million of letters of credit, and approximately $614.0 million available. The company reported compliance with facility covenants. Adoption of the new lease standard resulted in $704.6 million of operating lease assets and $844.2 million of operating lease liabilities on the balance sheet.
Material changes versus the prior comparable period
- Sales declined 1.9%; foreign exchange translation reduced sales by approximately $3.0 million. U.S. Retail sales fell 1.7%, U.S. Wholesale fell 1.9%, and International fell 2.8%.
- U.S. Retail comparable sales decreased 3.7%; management cited lower store traffic, Easter timing, persistent cold weather, and competitor liquidation. eCommerce growth partly offset declines.
- Gross margin fell 1.4 percentage points, primarily from channel and customer mix and higher eCommerce shipping costs. Operating income edged up 0.7%, as lower SG&A—particularly the absence of prior-year customer bankruptcy charges—offset weaker gross profit.
- Net income declined 18.8%, reflecting lower sales and gross profit, higher interest expense, and the debt-extinguishment loss. Q1 2018 included approximately $12.8 million of U.S. Wholesale charges related to a customer bankruptcy.
- Operating cash flow decreased to $37.0 million from $64.1 million, which management attributed primarily to working-capital changes and lower net income. The cash-flow statement reports unusually large offsetting changes in prepaid and other assets and accounts payable and other liabilities.
Outlook, management commentary, risks, and unusual items
- No specific full-year sales or earnings guidance is provided in the filing. The company planned approximately $85 million of fiscal 2019 capital expenditures, mainly for store openings and remodels, technology, and distribution facilities.
- Management expects cash on hand, operating cash flow, the revolving facility, and capital markets to support foreseeable cash needs. It noted that first-half performance is generally weaker than the second half and may not predict full-year results.
- In March 2019, the company redeemed $400 million of 5.25% notes due 2021 and issued $500 million of 5.625% notes due 2027, extending maturities. The refinancing generated the $7.8 million extinguishment loss.
- Cash returned to shareholders included $40.0 million of share repurchases and dividends of $0.50 per share. Approximately $352.6 million remained under repurchase authorizations; future repurchases and dividends are discretionary and may be constrained by credit-facility provisions.
- Risk factors include seasonal demand, store traffic and competitive pressures, foreign-exchange and variable-interest-rate exposure, and supplier and inventory risks. A 1% rate change on variable-rate borrowings outstanding would change annual pretax interest expense by approximately $1.3 million.
- The company reported no legal proceedings it believed would materially affect its financial position, results, or cash flows, and no material changes to the risk factors in its latest Form 10-K. It had $14.3 million of gross unrecognized tax benefits; the ultimate timing and recognition remain uncertain.
- Operating lease accounting was adopted in fiscal 2019 and materially increased reported balance-sheet assets and liabilities, without a material impact on income or cash flow, according to the filing.
Important facts for investors to verify
- Confirm the reporting period: the supplied filing is Q1 2019, not Q1 2018.
- Review the drivers and sustainability of the gross-margin decline, comparable-sales weakness, and eCommerce shipping costs.
- Reconcile the unusually large operating cash-flow working-capital movements and assess whether they are timing-related.
- Assess the refinancing’s higher stated coupon and extended maturity alongside total debt, lease obligations, and revolving-credit availability.
- Track execution of the approximately $85 million capital-spending plan, cash returns, and any covenant limits on dividends or repurchases.