Carter’s, Inc. Form 10-K Summary
Period clarification: The supplied filing is Carter’s fiscal 2015 annual report, for the 52 weeks ended January 2, 2016, filed February 25, 2016. It is not a 2014 Q4 filing. Fiscal 2014 had 53 weeks, including an extra fourth-quarter week, so annual comparisons are not fully like-for-like.
Business context and reporting period
Carter’s designs, sources, and sells children’s apparel under the Carter’s and OshKosh brands through wholesale, retail, eCommerce, licensing, and international channels. It operated 982 stores at year-end, including 835 in the U.S. and 147 in Canada. Carter’s represented 75.0% of sales, OshKosh 14.2%, and International 10.8%.
Financial results and liquidity
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Net sales | $3,013.9 million | $2,893.9 million |
| Gross profit / margin | $1,258.0 million / 41.7% | $1,184.4 million / 40.9% |
| Operating income / margin | $392.9 million / 13.0% | $333.3 million / 11.5% |
| Net income | $237.8 million | $194.7 million |
| Diluted EPS | $4.50 | $3.62 |
| Operating cash flow | $308.0 million | $282.4 million |
| Capital expenditures | $103.5 million | $103.5 million |
| Cash and cash equivalents at year-end | $381.2 million | $340.6 million |
| Total debt at year-end | $584.4 million | $586.0 million |
Reported sales rose 4.1%; the prior year’s 53rd week added approximately $44.1 million of sales, while foreign exchange reduced fiscal 2015 sales by about $35.1 million. Operating cash flow less capital expenditures was approximately $204.5 million. Working capital was $868.7 million. The company had $307.9 million of undrawn revolving-credit availability, after letters of credit. Its revolving facility was expanded to $500 million and matures in September 2020; the $400 million senior notes bear 5.25% interest and mature in 2021. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Operating income increased 17.9% and net income increased 22.2%; gross margin improved by 0.8 percentage points. Lower amortization, improved wholesale and international margins, and reduced corporate costs helped results.
- Carter’s Wholesale sales increased 2.4%; Carter’s Retail increased 5.9%. OshKosh Retail increased 8.3%, while OshKosh Wholesale declined 10.4%, reflecting lower units shipped, seasonal bookings, and off-price sales.
- Retail-store comparable sales declined 3.1% at Carter’s and 2.5% at OshKosh. Total direct-to-consumer comparable sales nevertheless increased 1.2% and 2.4%, respectively, supported by eCommerce growth.
- International sales increased 3.1% as reported, but currency movements reduced segment sales by approximately $35.1 million. The Target Canada bankruptcy reduced wholesale sales.
- The 2015 fourth quarter reported sales of $866.5 million and net income of $72.6 million, versus $869.2 million and $68.6 million in 2014. The 2014 fourth quarter contained 14 weeks versus 13 weeks in 2015, limiting comparability.
Outlook, commentary, risks, and unusual items
- Management expected operating cash flow, cash on hand, and revolving-credit availability to fund working capital and planned investment for the foreseeable future, while noting there is no assurance. Fiscal 2016 capital expenditures were projected at approximately $115 million; planned store openings were 131, with 10 projected closings. No numerical earnings or revenue guidance was provided.
- On February 24, 2016, the board authorized a new $500 million share-repurchase program, in addition to approximately $74.8 million remaining under prior authorizations, and increased the quarterly dividend to $0.33 per share.
- Key risks include dependence on major wholesale customers and concentrated receivables; reliance on a small group of vendors and one sourcing agent managing about 60% of inventory purchases; foreign exchange and sourcing disruption; promotional and cost pressures; consumer demand and inventory forecasting; and execution, technology, cybersecurity, and store-lease risks.
- The company reported $584.4 million of debt and substantial operating-lease commitments, with approximately $994.0 million of minimum lease payments. Debt covenants may constrain dividends, repurchases, and other financial actions.
- The filing describes prior SEC and U.S. Attorney’s Office investigations concerning customer margin support. The company entered an SEC non-prosecution agreement in 2010 conditioned on continued cooperation; related legal costs and proceedings may continue. The company stated it was not party to current legal proceedings it believed would materially adversely affect its financial position, results, or cash flows.
- There were no goodwill or indefinite-lived tradename impairments in 2015, and management said no reporting units were at risk. The final contingent-consideration payment for the Bonnie Togs acquisition was made, leaving no related liability.
Most important facts for investors to verify
- Assess sales and earnings trends after adjusting for the extra week in fiscal 2014 and currency effects, especially the weakness in comparable store sales and OshKosh Wholesale.
- Review the sustainability of margin improvement and the extent to which lower amortization, prior-period cost reductions, and favorable wholesale performance contributed.
- Monitor customer receivable concentration, vendor and sourcing-agent dependence, inventory levels, and the effects of foreign exchange and the Target Canada bankruptcy.
- Evaluate debt, lease obligations, covenant flexibility, and whether planned capital spending, dividends, and repurchases remain supportable by cash generation.
- Confirm subsequent-period execution against the fiscal 2016 store-opening and capital-expenditure plans; the filing provides no earnings guidance.