Carter’s, Inc. — Form 10-Q Summary
Period mismatch: The request identifies 2019 Q3, but the supplied filing is for the fiscal quarter ended September 26, 2020, compared with the quarter ended September 28, 2019. The filing is unaudited.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel and accessories under Carter’s, OshKosh, Skip Hop, and other brands. It reports U.S. Retail, U.S. Wholesale, and International segments. COVID-19 disrupted store traffic, wholesale demand, and operations; eCommerce performed strongly. At quarter-end, 1,095 of 1,104 North American stores were open.
Financial performance
| Metric | Fiscal Q3 2020 | Fiscal Q3 2019 | First three quarters 2020 | First three quarters 2019 |
|---|---|---|---|---|
| Net sales | $865.1 million | $943.3 million | $2,034.4 million | $2,418.8 million |
| Gross profit / margin | $383.7 million / 44.4% | $402.2 million / 42.6% | $847.5 million / 41.7% | $1,041.1 million / 43.0% |
| Operating income / margin | $113.5 million / 13.1% | $83.9 million / 8.9% | $56.0 million / 2.8% | $209.1 million / 8.6% |
| Net income | $81.2 million | $60.3 million | $10.7 million | $138.7 million |
| Diluted EPS | $1.85 | $1.34 | $0.24 | $3.06 |
| Operating cash flow | Not separately provided | Not separately provided | $320.1 million | $73.4 million |
Q3 sales declined 8.3%, while gross margin rose 180 basis points, supported by higher eCommerce selling prices, fewer promotions, lower inventory provisions, and channel mix. Q3 operating income benefited in part because the prior-year quarter included a $30.8 million Skip Hop tradename impairment. For the first three quarters, sales fell 15.9% and net income fell 92.3%; results included COVID-related inventory charges and goodwill and tradename impairments.
Q3 segment sales were $449.2 million in U.S. Retail (down 3.2%), $302.1 million in U.S. Wholesale (down 14.2%), and $113.8 million in International (down 10.4%). Year-to-date International operating results were a $15.8 million loss, including impairment charges.
Liquidity, debt, and cash flow
At September 26, 2020, cash and cash equivalents were $831.2 million, total current assets were $1.80 billion, and current liabilities were $760.9 million. Total debt was $1.00 billion principal amount of senior notes (reported net of issuance costs at $989.1 million); the notes carry interest rates of 5.500% and 5.625% and mature in 2025 and 2027. There were no revolving-credit borrowings, $7.0 million of letters of credit, and approximately $743.0 million of revolver availability. Management reported total liquidity of approximately $1.57 billion.
Year-to-date operating cash flow of $320.1 million compared with $73.4 million a year earlier. Management attributed the increase primarily to extended payment terms and deferred store lease payments, partly offset by lower earnings. Investing cash outflow was $25.2 million; financing cash inflow was $319.6 million. The company reported $31.8 million of accrued fixed rent payments deferred during the period and said required rent payments had resumed by quarter-end. Operating lease liabilities totaled $759.5 million on a present-value basis.
Material changes, outlook, and risks
- COVID-19 led to temporary store closures, weaker wholesale shipments and store traffic, and higher credit and inventory reserves. eCommerce and omni-channel sales helped offset declines.
- Year-to-date charges included $17.7 million of goodwill impairment, $26.5 million of tradename impairments, $20.9 million of excess and obsolete inventory provisions, and $16.2 million of adverse inventory and fabric purchase commitments. The filing also reports $6.7 million of store and other long-lived asset impairments and $18.8 million of COVID-related costs for the first three quarters.
- The company amended its revolving credit facility, with financial covenant waivers through fiscal 2020 and revised requirements thereafter. It must maintain at least $700 million of monthly liquidity through delivery of its fiscal Q3 2021 financial statements and certificates. The company said it was compliant at quarter-end.
- Dividends and open-market share repurchases were suspended. The revolver amendment also restricts certain dividends and repurchases during the specified covenant period. Year-to-date dividends were $0.60 per share; none were paid in Q3.
- Management expected available and anticipated liquidity sources to fund projected requirements for at least the next 12 months, while noting significant uncertainty from COVID-19 and the possibility of further cost reductions if conditions worsened. No specific sales or earnings guidance was provided. Fiscal 2020 capital expenditures were reduced to approximately $40 million from approximately $75 million planned earlier. Additional restructuring charges of approximately $1.0 million to $2.0 million were expected through fiscal 2021.
- Management identified possible further impairment risk if economic conditions deteriorate. Inventory purchase commitments may be canceled in some cases, potentially with termination charges; the company had a $15.4 million reserve for adverse inventory and fabric commitments. It reported no legal proceedings expected to have a material adverse effect.
- The filing describes a prior-period cash-flow presentation error related to noncash lease activity. Management concluded previously issued statements were not materially misstated and said the error did not affect reported operating cash flow.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2020, not Q3 2019.
- Track sales recovery by channel and segment, especially wholesale demand, store traffic, and eCommerce growth.
- Assess whether operating cash generation remains sustainable apart from payment-term extensions and rent deferrals.
- Monitor debt service, the $700 million minimum-liquidity covenant, and restrictions on dividends and repurchases.
- Review subsequent inventory reserves, purchase commitments, impairment assessments, and COVID-19-related costs.