Carter’s, Inc. — Form 10-K Summary
Reporting period: Fiscal 2020, ended January 2, 2021 (53 weeks), compared with fiscal 2019 ended December 28, 2019 (52 weeks). Although the request metadata says “2019 Q4,” this filing reports fiscal 2020, not fiscal 2019. The extra week contributed approximately $32.1 million of revenue.
Business context and results
Carter’s designs, sources, and sells children’s apparel and related products under the Carter’s, OshKosh, and Skip Hop brands. Its channels include U.S. retail and eCommerce, U.S. wholesale, and international operations. The company attributed substantial disruption in fiscal 2020 to COVID-19, including temporary store closures, lower wholesale demand, and supply-chain delays; eCommerce grew.
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $3.024 billion | $3.519 billion | Down 14.1% |
| Gross profit / margin | $1.313 billion / 43.4% | $1.509 billion / 42.9% | Profit down 12.9%; margin up 50 bps |
| Operating income / margin | $189.9 million / 6.3% | $371.9 million / 10.6% | Down 48.9% |
| Net income | $109.7 million | $263.8 million | Down 58.4% |
| Diluted EPS | $2.50 | $5.85 | Down 57.3% |
| Operating cash flow | $589.9 million | $387.2 million | Up 52.3% |
Gross margin improved primarily on higher eCommerce average selling prices, fewer promotions, and lower product costs, partly offset by pandemic-related inventory and fabric commitments, excess-inventory charges, and handling costs. SG&A fell 3.1% in dollars but rose to 36.6% of sales from 32.4%, reflecting lower sales, higher eCommerce fulfillment costs, store-cost deleverage, COVID-19 costs, restructuring, lease impairments, and bad debt expense. Operating cash flow benefited from extended vendor payment terms and deferred store rent, and management expected these benefits to reverse in fiscal 2021.
Segments and material changes
| Segment | Fiscal 2020 sales | Year-over-year change | Operating result |
|---|---|---|---|
| U.S. Retail | $1.672 billion | Down 11.3% | $146.8 million; margin 8.8% vs. 12.0% |
| U.S. Wholesale | $996.1 million | Down 17.4% | $141.5 million; margin 14.2% vs. 17.6% |
| International | $356.6 million | Down 17.0% | $1.2 million operating loss, versus $36.7 million income |
Retail declines reflected store closures and reduced traffic, partly offset by eCommerce growth. Wholesale sales weakened with customer disruptions, while exclusive-brand U.S. sales to the company’s three largest wholesale customers grew 12.5%. International results included COVID-related closures and a $17.7 million goodwill impairment. The company recorded $26.5 million of intangible impairments, $17.7 million of goodwill impairment, and $9.0 million of store and other long-lived asset impairments in fiscal 2020. Fiscal 2019 included a $30.8 million Skip Hop tradename impairment, so impairment charges affected year-over-year comparability.
Cash, debt, and liquidity
- Cash and cash equivalents were $1.102 billion, up from $214.3 million. Current assets were $1.946 billion and current liabilities $792.5 million.
- Gross senior notes outstanding were $1.0 billion: $500 million at 5.500% due 2025 and $500 million at 5.625% due 2027. There were no revolver borrowings at year-end; approximately $745 million was available, after $5 million of letters of credit. Reported total liquidity was approximately $1.85 billion.
- Interest expense increased 49.0% to $56.1 million, reflecting higher average borrowings. Fiscal 2020 weighted-average borrowings were $1.03 billion at an effective rate of 5.39%.
- Inventory was $599.3 million, up 0.9%; net receivables were $186.5 million, down 25.7%. Accounts payable rose to $472.1 million from $183.6 million, contributing to operating cash flow growth.
- Operating lease liabilities totaled approximately $739.6 million. The filing lists $808.7 million of undiscounted operating lease payments.
Outlook, risks, and unusual items
- Management said available cash, operating cash flow, and revolver capacity were expected to fund requirements for at least the next 12 months, while noting uncertainty around COVID-19. No specific revenue or earnings guidance is provided.
- Fiscal 2021 capital expenditures were projected at approximately $50 million. Operating cash flow was expected to face pressure from reduced vendor payment terms and payment of deferred fiscal 2020 rent.
- The company planned to close approximately 25% of its current stores as leases permit, with over 100 closures planned by fiscal 2021 year-end. It had 1,101 stores at fiscal year-end; 940 were open, including 133 closed in Canada and other closures in Mexico.
- Fiscal 2020 restructuring charges were $16.6 million; approximately $7.7 million remained accrued for severance and related benefits. A further $2.0–$3.0 million of restructuring charges was expected in fiscal 2021.
- The company suspended its share-repurchase program and quarterly dividend during 2020. It paid $0.60 per share in the first quarter; credit-facility provisions restricted dividends and repurchases through delivery of third-quarter 2021 financial statements and could constrain them thereafter.
- Key risks include ongoing pandemic and consumer-demand impacts; dependence on major wholesale customers and concentrated suppliers; sourcing and freight disruptions, tariffs, and China-related exposure; inventory forecasting and markdown risk; store economics and lease obligations; and potential further asset impairments. Approximately 58% of products came from ten vendors, and about 78% of fabric was sourced from China. Three wholesale customers represented about 69% of gross trade receivables.
- The auditor issued unqualified opinions on the financial statements and internal control. The filing also describes a nonmaterial correction to prior cash-flow statement presentation related to lease accounting; it did not change reported operating cash flow.
Important facts for investors to verify
- Whether revenue, margins, and online growth recover as stores reopen and pandemic effects ease, particularly in International operations.
- Whether the $1.85 billion liquidity position remains available after working-capital changes, deferred rent payments, and required debt-service costs.
- Progress and costs of planned store closures, restructuring, and lease concessions, including the expected fiscal 2021 cash-flow impact.
- Whether wholesale customer credit quality and supplier concentration create additional bad-debt, inventory, or supply-chain exposure.
- Whether OshKosh, Skip Hop, or goodwill valuations face further impairment if sales or forecasts weaken.