Carter’s, Inc. — Form 10-K Summary
Reporting period: The filing is the annual report for the fiscal year ended December 28, 2013 (52 weeks), not a 2012 Q4 filing. It also provides unaudited fourth-quarter 2013 results compared with fourth-quarter 2012.
Business context
Carter’s designs, sources, and markets children’s apparel, primarily under the Carter’s and OshKosh brands. Sales come from wholesale, company-operated stores, e-commerce, international operations, and licensing. At year-end, the company operated 476 Carter’s and 181 OshKosh stores in the U.S., plus 102 stores in Canada.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $2.639 billion | $2.382 billion |
| Gross profit / margin | $1.095 billion / 41.5% | $938.0 million / 39.4% |
| Operating income / margin | $264.2 million / 10.0% | $262.0 million / 11.0% |
| Net income | $160.4 million | $161.2 million |
| Diluted EPS | $2.75 | $2.69 |
| Operating cash flow | $209.7 million | $278.6 million |
| Capital expenditures | $182.5 million | $83.4 million |
Sales grew 10.8%; higher direct-to-consumer mix and lower product costs lifted gross margin. Operating income was nearly flat as SG&A rose faster than sales, including higher store, distribution, e-commerce, office-consolidation, and Japan-related costs. Net income edged down as higher interest and other expenses offset operating growth. Cash from operations declined primarily due to working-capital changes; reported operating cash flow less capital expenditures was approximately $27.2 million.
Year-end cash was $286.5 million, down from $382.2 million. Working capital was $701.2 million. Total debt was $586.0 million: $400 million of 5.25% senior notes due 2021 and $186 million drawn on the revolving facility. Revolver availability was approximately $179.5 million, net of letters of credit. The company reported compliance with its debt covenants.
Fourth-quarter 2013 sales were $769.7 million, operating income $73.4 million, and net income $42.7 million, compared with $689.3 million, $78.4 million, and $48.7 million, respectively, in Q4 2012. Diluted EPS was $0.78 versus $0.81.
Material changes and notable items
- Carter’s retail sales grew 16.5%, supported by new stores and e-commerce; comparable store sales rose 1.0%. OshKosh retail sales increased 2.1%, despite a 3.4% comparable-store decline. OshKosh wholesale sales fell 6.5%.
- International sales rose 30.7% to $285.3 million, including sales from Japan operations assumed from a licensee. The company decided in Q4 to exit Japan after recording an $11.3 million operating loss, including $4.1 million in exit costs.
- SG&A included $33.3 million of office-consolidation charges, $1.9 million of Hogansville facility closure costs, and $13.6 million of amortization related to acquired tradenames. Management expected about $5 million of additional office-consolidation costs and $6 million of Japan exit costs in FY 2014.
- The company spent $400 million on accelerated share repurchases and repurchased an additional $54.1 million of shares in open-market transactions. It paid $0.48 per share in dividends during FY 2013. Shares outstanding declined; diluted EPS rose despite lower net income.
Outlook, risks, and contingencies
Management said operating cash flow, cash on hand, and available revolver capacity should meet working-capital and capital needs for the foreseeable future, while noting this is not assured. Planned FY 2014 capital expenditures were approximately $100 million. Store plans included about 60 Carter’s and 24 OshKosh U.S. openings, and approximately 20 Canadian openings.
Management anticipated higher 2014 product costs, particularly foreign-manufacturer labor costs, and cautioned that pricing may not fully offset cost increases and competitive price pressure. Other significant risks include reliance on foreign sourcing and a sourcing agent responsible for about 70% of inventory purchases; customer concentration and receivable exposure; inventory forecasting; consumer demand and fashion trends; store leases; cybersecurity and product compliance; and debt service and covenant restrictions. A contract at the port used for most sourcing was scheduled to expire July 1, 2014, creating potential disruption risk.
The company reported no goodwill or indefinite-lived tradename impairment at year-end. It disclosed ongoing costs related to previously reported SEC and U.S. Attorney’s Office investigations; the SEC non-prosecution agreement was conditioned on continued cooperation. It stated that pending or threatened ordinary-course legal matters were not believed to have a material adverse effect. The independent auditor reported effective internal control over financial reporting.
Investor facts to verify
- Whether sales growth and improved gross margin can continue while SG&A costs and store expansion rise.
- Progress and final costs of the Japan exit and office consolidation, including expected FY 2014 charges.
- Working-capital and inventory trends, given the 19.5% year-over-year increase in inventory and lower operating cash flow.
- Debt, revolver availability, covenant headroom, and the impact of interest-rate changes and restrictions on dividends or repurchases.
- Execution of planned capital spending, new store openings, distribution capacity, and mitigation plans for sourcing or port disruptions.