Carter’s, Inc. Form 10-Q Summary
Period: The filing covers the fiscal quarter ended July 4, 2015, and the first two fiscal quarters of fiscal 2015; each quarter contained 13 weeks. The request metadata says “2014 Q2,” which does not match the filing period.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel under Carter’s, OshKosh, and related brands through wholesale, retail, eCommerce, and licensing channels. At quarter-end, it operated 562 Carter’s U.S. stores, 221 OshKosh U.S. stores, and 133 stores in Canada.
Key financial results
| Metric | Q2 2015 | Q2 2014 | First two quarters 2015 | First two quarters 2014 |
|---|---|---|---|---|
| Net sales | $612.8 million | $574.1 million | $1,297.5 million | $1,225.7 million |
| Gross profit / margin | $262.9 million / 42.9% | $245.5 million / 42.8% | $546.9 million / 42.2% | $507.2 million / 41.4% |
| Operating income / margin | $62.0 million / 10.1% | $47.3 million / 8.2% | $146.5 million / 11.3% | $108.9 million / 8.9% |
| Net income | $36.1 million | $25.9 million | $85.9 million | $60.2 million |
| Diluted EPS | $0.68 | $0.48 | $1.62 | $1.11 |
| Operating cash flow | Not separately presented | Not separately presented | $27.1 million | $33.1 million |
Sales increased 6.7% in Q2 and 5.9% year to date. Gross margin improved modestly in Q2 and by 0.8 percentage points year to date. Operating income rose 30.8% in Q2 and 34.5% year to date; net income rose 39.4% and 42.7%, respectively. Management attributed operating improvement to higher sales, lower relative SG&A, and reduced prior-year office-consolidation and trademark-amortization costs.
Q2 sales growth was broad-based. Carter’s U.S. retail sales grew 5.7%, Carter’s wholesale 5.8%, OshKosh retail 8.8%, OshKosh wholesale 22.8%, and international sales 8.4%. U.S. direct-to-consumer comparable sales were positive overall, supported by eCommerce growth, while comparable store sales declined at both Carter’s and OshKosh.
Financial position, liquidity, and capital allocation
- At July 4, 2015, cash and cash equivalents were $244.3 million; total assets were $1.890 billion and stockholders’ equity was $802.9 million.
- Long-term debt was $586.3 million: $400 million of senior notes bearing 5.25% interest and $186.3 million drawn on the revolving credit facility. The revolver had $182.3 million available, excluding $6.4 million of letters of credit; the company reported compliance with its financial covenants.
- Operating cash flow of $27.1 million was below capital expenditures of $50.3 million. Cash declined $96.3 million in the first two quarters to $244.3 million, reflecting investing and financing outflows, including repurchases and dividends.
- Capital expenditures were $50.3 million year to date; management planned approximately $130 million for fiscal 2015. The company repurchased 504,225 shares for $48.9 million and paid $23.1 million in dividends year to date. Quarterly dividends were $0.22 per share. Remaining repurchase authorization was approximately $136.2 million.
- Inventory was $544.3 million, up 1.1% from June 2014; management cautioned that seasonal balances are not directly comparable with fiscal year-end.
Outlook, commentary, and risks
- Management expected a fiscal 2015 effective income tax rate of approximately 36.0% and approximately $130 million in capital expenditures. It did not provide a specific full-year sales or earnings forecast in the supplied filing text.
- Management said cash on hand, operating cash flow, and available revolver capacity were expected to meet foreseeable requirements. It also noted that first-half results may not indicate full-year performance because sales and profitability are generally stronger in the second half.
- Foreign exchange movements reduced consolidated sales by approximately $5.6 million in Q2 and $11.1 million year to date. A $1.9 million Q2 gain on foreign currency hedges increased other income; the contracts are not designated for hedge accounting, so fair-value changes can affect earnings.
- Canadian wholesale sales were affected by the Target Canada bankruptcy. The company also cited currency exposure, variable-rate debt, supplier purchase commitments, and seasonal working-capital needs as risks. A 1 percentage point rate change on variable borrowings would change annual pretax interest cost by approximately $1.9 million.
- A $9.0 million Bonnie Togs contingent-consideration liability remained current; the final payment was scheduled for August 2015. Gross unrecognized income tax benefits were approximately $9.8 million, including $1.7 million of reserves for which the statute of limitations was expected to expire within the next fiscal year.
- The company reported no legal proceedings it believed would materially affect its financial position, results, or cash flows, and no material changes to its previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2015, not Q2 2014.
- Assess whether sales growth and margin improvement can persist, especially given declining comparable store sales and reliance on new stores and eCommerce for retail growth.
- Track operating cash conversion, inventory levels, and planned capital spending against seasonal working-capital demands.
- Monitor Canadian currency exposure, the impact of Target Canada’s bankruptcy, and volatility from non-hedge-accounted currency contracts.
- Review debt covenant capacity, revolver availability, and the sustainability of repurchases and dividends alongside investment needs.