Carter’s, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter ended September 27, 2014, and first three fiscal quarters of fiscal 2014, compared with periods ended September 28, 2013. The filing is for 2014 Q3, notwithstanding the request metadata’s 2013 Q3 label. Fiscal 2014 is a 53-week year. Carter’s designs, sources, and markets children’s apparel through wholesale, retail, e-commerce, and licensing channels.
Financial performance
| Metric | Q3 2014 | Q3 2013 | First three quarters 2014 | First three quarters 2013 |
|---|---|---|---|---|
| Net sales | $798.9 million | $760.2 million | $2,024.6 million | $1,869.1 million |
| Gross profit / margin | $321.2 million / 40.2% | $309.6 million / 40.7% | $828.4 million / 40.9% | $773.0 million / 41.4% |
| Operating income / margin | $110.5 million / 13.8% | $91.1 million / 12.0% | $219.3 million / 10.8% | $190.8 million / 10.2% |
| Net income | $65.9 million | $56.6 million | $126.1 million | $117.7 million |
| Diluted EPS | $1.23 | $0.97 | $2.34 | $1.98 |
- Q3 sales increased 5.1%; year-to-date sales rose 8.3%. Growth came chiefly from Carter’s and OshKosh retail and international sales; Carter’s wholesale declined in Q3, while OshKosh wholesale declined year to date.
- Gross margin fell 0.5 percentage points in both comparisons, as higher product costs outweighed favorable direct-to-consumer mix and freight costs. Operating income rose on sales growth and lower SG&A as a share of sales.
- Q3 SG&A decreased 3.2% to $221.9 million; year-to-date SG&A increased 4.7% to $638.3 million, mainly reflecting higher store and distribution costs, partly offset by lower consolidation and Japan-exit costs.
- Interest expense was $6.8 million in Q3 and $20.6 million year to date, up from $4.1 million and $6.7 million, respectively, reflecting higher average borrowings and interest rates following the 2013 senior-note issuance.
Cash, debt, and liquidity
- At September 27, 2014, cash was $133.6 million; total debt was $586.0 million: $400 million of 5.25% senior notes due August 2021 and $186 million drawn on the revolving facility. The company reported $182.5 million of revolver availability after $6.5 million of letters of credit and was in compliance with facility covenants.
- Operating cash flow for the first three fiscal quarters was $24.9 million, down from $63.5 million. The company attributed the decline to working-capital movements associated with growth, higher product costs, and inventory-payment timing.
- Investing cash outflow was $83.5 million, including $83.6 million of capital expenditures. Financing cash outflow was $94.6 million, including $62.8 million of share repurchases and $30.5 million of dividends. Cash declined $152.9 million from year-end.
- Inventory was $519.4 million, up 17.9% from the prior-year quarter, reflecting higher product costs and business growth. Current assets were $955.4 million and current liabilities $217.8 million.
Changes, outlook, and risks
- Management planned fiscal 2014 capital expenditures of approximately $100–110 million, primarily for store openings and remodelings, information technology, and distribution capacity. Planned store activity for the year: approximately 61 Carter’s openings and six closures; 27 OshKosh openings and eight closures; and 23 Canadian openings and two closures.
- No full-year earnings or sales guidance is provided in the supplied filing text. Management said available cash, operating cash flow, and revolver borrowings were expected to fund ongoing needs for the foreseeable future, while noting there can be no assurance.
- Key business risks include product-cost inflation and margin pressure, dependence on a small group of wholesale customers and suppliers, consumer and fashion demand, and foreign sourcing and currency exposure. The company noted that its principal shipping port’s labor contract expired July 1, 2014, with negotiations ongoing, creating potential disruption risk.
- Q3 included no additional office-consolidation or Japan-exit costs. Year-to-date office-consolidation costs were $6.6 million; the company expected no further fiscal 2014 costs for this project. It also expected no further fiscal 2014 Japan-exit costs. A $7.6 million Bonnie Togs contingent-consideration liability remained current.
- The company reported approximately $12.0 million of gross unrecognized tax benefits, including $1.3 million expected to be affected by statute expirations within the next fiscal year. It reported ordinary-course legal claims but no proceedings it believed would materially adversely affect financial position, results, or cash flows.
- Management identified seasonality and warned that interim results are not necessarily indicative of full-year results. A new revenue-recognition standard was expected to take effect for the company in fiscal 2017; its impact was still under evaluation.
Investor verification priorities
- Check whether inventory growth and weaker operating cash flow reflect planned seasonal growth or emerging sell-through and working-capital pressure.
- Assess the sustainability of sales and earnings growth against lower gross margins, product-cost inflation, and the decline in Carter’s Q3 wholesale shipments to a major customer.
- Monitor debt service, variable-rate exposure, revolver availability, covenant compliance, and the capacity to maintain dividends and repurchases.
- Verify delivery of planned store openings, distribution expansion, and remaining office-consolidation and Japan-exit obligations.
- Track customer and supplier concentration, port-labor developments, foreign exchange effects, and tax-benefit uncertainty.