Carter’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the fiscal quarter ended September 28, 2013, and the first three fiscal quarters of fiscal 2013. The request metadata says “2012 Q3,” but the filing itself is for 2013 Q3. Comparative periods ended September 29, 2012. Carter’s designs, sources, and markets children’s apparel through wholesale, retail, eCommerce, and licensing; it reported 737 retail stores across the U.S., Canada, and Japan.
Key financial results
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2012 period.
| Metric | Fiscal quarter | First three fiscal quarters |
|---|---|---|
| Net sales | $760.2; up 13.7% | $1,869.1; up 10.4% |
| Gross profit / margin | $309.6 / 40.7%, versus $270.1 / 40.4% | $773.0 / 41.4%, versus $648.1 / 38.3% |
| Operating income / margin | $91.1 / 12.0%, versus $95.4 / 14.3% | $190.8 / 10.2%, versus $183.6 / 10.8% |
| Net income / net margin | $56.6 / 7.4%, versus $59.4 / 8.9% | $117.7 / 6.3%, versus $112.5 / 6.6% |
| Diluted earnings per share | $0.97, versus $0.99 | $1.98, versus $1.88 |
| Operating cash flow | Not separately reported | $63.5, versus $129.2 |
| Capital expenditures | Not separately reported | $129.6, versus $59.8 |
Gross margin benefited from lower product costs and a greater mix of direct-to-consumer sales. SG&A rose to 30.2% of quarterly sales from 27.7%, and to 32.6% for the three-quarter period from 29.0%, reflecting expansion and other costs described below.
Financial position and liquidity
- At September 28, 2013, cash and cash equivalents were $201.8 million; current assets were $944.2 million and current liabilities were $243.7 million.
- Total debt was $586.0 million: $400.0 million of senior notes and $186.0 million drawn on the revolving credit facility. The company also had $12.3 million of letters of credit and approximately $176.7 million of revolver availability. It reported compliance with its financial debt covenants.
- The senior notes, issued in August 2013, bear interest at 5.25% and mature August 15, 2021. The revolver rate was 1.68% at quarter-end.
- Cash from operations declined mainly because of increased accounts receivable and inventory. Nine-month operating cash flow less capital expenditures was negative $66.2 million, before other investing and financing activity.
- Cash fell by $180.4 million during the first three fiscal quarters. Financing included $400 million in senior-note proceeds, $454.1 million in share repurchases, and $19.0 million in dividends; investing included $129.6 million in capital expenditures and $38.0 million for tradenames.
Changes versus the prior comparable period
- Quarterly sales grew across Carter’s wholesale and retail, international, and OshKosh retail; OshKosh wholesale declined. For the three-quarter period, Carter’s and international sales grew, while OshKosh sales declined.
- Carter’s retail growth reflected new stores and eCommerce, with comparable-store sales up 0.5% for the quarter and 1.5% for the three-quarter period. OshKosh comparable-store sales declined 3.9% for the three-quarter period; OshKosh wholesale shipments also fell.
- International sales increased 21.1% in the quarter and 29.7% for the three-quarter period, including sales from Japanese operations launched in Q1 2013.
- Despite higher quarterly sales and gross profit, operating income fell 4.5% and net income fell 4.7%, largely amid higher SG&A. For the three-quarter period, operating income rose 3.9% and net income rose 4.6%.
- Debt increased from $186.0 million at year-end 2012 to $586.0 million after the senior-note issuance. Stockholders’ equity fell from $985.5 million to $658.9 million, principally amid the share repurchases and dividends.
Outlook, commentary, risks, and unusual items
- Plans: Management expected fiscal 2013 capital expenditures of approximately $180–$200 million. It planned about 66 Carter’s store openings, 18 OshKosh openings, and 21 Canadian openings for the year, alongside planned closures. These are stated plans, not earnings guidance; the filing gives no clear full-year earnings forecast.
- Office consolidation and facility closure: The company recorded $24.1 million of office-consolidation costs in the first three fiscal quarters and expected full-year pre-tax costs of $38–$42 million, including approximately $36 million cash charges and $4 million non-cash accelerated depreciation. It expected substantial completion by year-end. Hogansville distribution-facility closure charges were expected to total approximately $2.5 million for fiscal 2013.
- Other unusual items: Carter’s paid $38.0 million for brand tradenames, amortized over three years. It paid $14.7 million of Bonnie Togs contingent consideration during the quarter; $16.5 million remained accrued. The company entered into $400 million of accelerated share repurchase agreements, with final settlement expected by Q2 2014; the number of shares ultimately repurchased remained subject to settlement terms.
- Shareholder returns: The company paid quarterly dividends of $0.16 per share in Q2 and Q3. Future dividends and repurchases are discretionary and may be restricted by debt agreements.
- Risks highlighted: The business is seasonal and exposed to consumer demand, fashion trends, price competition, product and freight costs, foreign sourcing and supply-chain disruption, and foreign currency and interest-rate changes. Four largest customers represented about 22% of sales for the three-quarter period; one sourcing agent managed approximately 77% of inventory purchases. The company also cited risks related to store expansion, international operations, eCommerce, distribution transitions, office consolidation, debt, and covenant restrictions.
- Contingencies and controls: The company reported ordinary-course claims and lawsuits but did not believe any then-pending matter would materially adversely affect its financial position, results, or cash flows. It also disclosed continuing costs and management distraction potentially related to earlier SEC and U.S. Attorney investigations; the SEC had entered a non-prosecution agreement with the company in 2010, subject to continued cooperation. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended period: the filing is for Q3 2013, not Q3 2012.
- Track whether sales growth translates into operating-profit improvement as office-consolidation, store, Japan, distribution, and eCommerce costs evolve.
- Monitor working-capital needs, inventory levels, operating cash flow, capital spending, and revolver availability.
- Review final accelerated-repurchase settlement, resulting share count, and the effect of debt covenants on future repurchases and dividends.
- Compare actual consolidation and closure charges and capital expenditures with management’s stated fiscal 2013 estimates.
- Assess customer and sourcing-agent concentration, international expansion, supply-chain exposure, and debt-service capacity.