Carter’s, Inc. — Form 10-Q Summary
Period and context: The filing covers the fiscal quarter and first two fiscal quarters ended July 1, 2017. The request metadata says “2016 Q2,” but the filing itself is for 2017 Q2. Financial statements are unaudited. Carter’s designs, sources, and sells children’s apparel and related products through wholesale, retail, and eCommerce channels. It operated 978 stores at quarter-end.
Key financial results
| Metric | Q2 2017 | Q2 2016 | First two quarters 2017 | First two quarters 2016 |
|---|---|---|---|---|
| Net sales | $692.1 million | $639.5 million | $1,424.9 million | $1,363.6 million |
| Gross profit / margin | $303.5 million / 43.8% | $282.2 million / 44.1% | $619.3 million / 43.5% | $593.1 million / 43.5% |
| Operating income / margin | $64.5 million / 9.3% | $63.2 million / 9.9% | $143.1 million / 10.0% | $156.3 million / 11.5% |
| Net income | $37.9 million | $36.2 million | $84.6 million | $90.2 million |
| Diluted EPS | $0.78 | $0.71 | $1.73 | $1.75 |
| Operating cash flow | Not separately provided for the quarter | $107.3 million | $85.6 million |
Financial position and liquidity
- At July 1, cash and equivalents were $173.6 million; current assets were $993.7 million and current liabilities $312.0 million.
- Long-term debt, net, was $661.8 million: $395.8 million of senior notes, net, and $266.0 million drawn on the revolving facility. The notes have a 5.25% coupon and mature in August 2021.
- After quarter-end, on July 19, the company borrowed another $100 million for seasonal working capital, bringing revolver borrowings to $366 million. Management expected to make repayments by fiscal year-end.
- Operating cash flow improved year over year, largely from favorable working-capital timing. Investing cash use included $143.7 million for Skip Hop and $34.3 million in capital expenditures. Financing cash use included $98.2 million of share repurchases and $35.8 million of dividends.
Changes and business drivers
- Quarterly sales rose 8.2%; first-half sales rose 4.5%. Growth was led by U.S. Retail, with contributions from new stores, eCommerce, and Skip Hop. Foreign exchange reduced sales by approximately $2.6 million in Q2 and $1.2 million year to date.
- Q2 U.S. Wholesale sales increased 1.2%, but the business excluding Skip Hop declined; management cited lower unit shipments and average price. International sales increased 15.4%, including Skip Hop contribution.
- U.S. Retail comparable sales increased 6.0% in Q2, including eCommerce growth of 27.6%; first-half comparable sales increased 1.1%, as store comps declined 5.0% while eCommerce grew 23.5%.
- Gross margin declined in Q2 due primarily to lower wholesale margins and higher inventory provisions. SG&A increased 9.5% in Q2 and 8.8% year to date, reflecting new stores, eCommerce, Skip Hop, marketing, and other costs. Consequently, first-half operating income fell 8.4% and net income fell 6.2%.
- Skip Hop was acquired on February 22, 2017 for net cash consideration of $143.7 million. From acquisition through July 1 it contributed $35.4 million in sales and an operating loss of approximately $0.4 million. The purchase accounting remains provisional; potential additional consideration is up to $10 million.
Outlook, risks, and contingencies
- Management estimated fiscal 2017 capital expenditures of approximately $90 million and an effective tax rate of approximately 35%. No full-year sales or earnings guidance is stated in the provided filing text.
- The company noted seasonal fluctuations, with sales and gross profit generally lower in the first half than in the second half. It expected cash, operating cash flow, and available revolver capacity to meet foreseeable needs.
- Revolver borrowings carry variable rates; management estimated a 1 percentage-point rate change on July 1 borrowings would change annual pretax interest expense by about $2.7 million. Foreign currency movements and supplier commitments are also identified exposures.
- The company was in compliance with credit-facility covenants. It reported no legal proceedings believed to have a material adverse effect and no material changes to previously disclosed risk factors. Skip Hop’s controls were still being integrated, with completion expected within one year of acquisition.
- Future dividends and repurchases are discretionary and could be restricted by debt covenants. The company had $176.2 million remaining under share-repurchase authorizations at July 1.
Most important facts for investors to verify
- Whether sales growth and eCommerce momentum persist, and whether the underlying wholesale business stabilizes apart from Skip Hop.
- Whether margin pressure, inventory provisions, and higher operating costs ease in the second half.
- Skip Hop’s performance, final purchase accounting, and any earnout payment up to $10 million.
- Seasonal borrowing and repayment: revolver debt increased to $366 million after quarter-end; monitor liquidity, interest costs, and covenant headroom.
- Execution of the approximately $90 million capital-spending plan and the effect of buybacks and dividends on cash and leverage.