Carter’s, Inc. Form 10-Q Summary
Reporting period: Fiscal quarter ended June 27, 2020; comparisons are with the quarter ended June 29, 2019. The request metadata says 2019 Q2, but the supplied filing is for 2020 Q2.
Business context and results
Carter’s designs, sources, and markets children’s apparel and accessories through retail stores, eCommerce, wholesale, and licensing. COVID-19 disruptions, including temporary store closures and weaker wholesale demand, materially affected the period. The company had reopened 1,026 of 1,099 North American stores by quarter-end.
| Metric | Q2 2020 | Q2 2019 | First two quarters 2020 | First two quarters 2019 |
|---|---|---|---|---|
| Net sales | $514.9 million | $734.4 million | $1,169.4 million | $1,475.4 million |
| Gross profit / margin | $235.5 million / 45.7% | $323.0 million / 44.0% | $463.8 million / 39.7% | $638.9 million / 43.3% |
| Operating income (loss) | $21.0 million | $64.5 million | $(57.5) million | $125.2 million |
| Net income (loss) | $8.2 million | $43.9 million | $(70.5) million | $78.4 million |
| Diluted earnings (loss) per share | $0.19 | $0.97 | $(1.64) | $1.72 |
Cash, debt, and liquidity
- Cash and cash equivalents were $1.001 billion at June 27, 2020, versus $214.3 million at December 28, 2019.
- First-half operating cash flow was $238.8 million, compared with $104.5 million a year earlier. The increase was primarily attributed to deferred rent and other cash payments, partly offset by lower earnings. Capital expenditures were $16.7 million; operating cash flow less capital expenditures was $222.1 million.
- Long-term debt, net, was $1.233 billion, including $1.0 billion principal amount of senior notes and $244 million drawn on the revolving credit facility. Approximately $501 million remained available under the facility; letters of credit outstanding were $5 million.
- The company issued $500 million of 5.500% senior notes due 2025 and used proceeds, together with cash, to repay revolving-credit borrowings. Existing notes include $500 million of 5.625% senior notes due 2027.
- Amended credit terms require minimum liquidity of $700 million through delivery of third-quarter 2021 financial statements. Financial covenants were waived for the balance of 2020, with revised requirements thereafter. The company reported covenant compliance at quarter-end.
- Operating lease liabilities totaled $783.7 million on a present-value basis. The company had accrued $35.8 million of rent payments deferred for temporarily closed stores.
Material changes and unusual items
- Q2 sales fell 29.9% year over year. U.S. Retail sales declined 25.3%, U.S. Wholesale 33.8%, and International 42.6%. eCommerce growth partly offset store closures and lower wholesale shipments.
- Q2 gross margin rose 170 basis points, mainly due to higher average selling prices and better-than-expected sales of inventory previously reserved. First-half gross margin fell 360 basis points, reflecting inventory provisions and adverse inventory and fabric purchase commitments.
- First-half results included $17.7 million of goodwill impairment and $26.5 million of tradename impairment, recorded in Q1 following COVID-related deterioration in sales expectations and market capitalization. The company also recorded $23.1 million of inventory-related charges and $18.1 million of adverse purchase-commitment charges.
- Q2 SG&A included COVID-related payroll and employee costs, protective equipment and cleaning supplies, restructuring, and other costs, partly offset by a payroll tax benefit. The filing reports $3.5 million of restructuring charges in Q2 and expects a further $1 million to $2 million in fiscal 2020.
- Q2 interest expense rose 68.8% to $15.3 million as average borrowings increased. The first-half net loss also reflects impairments and increased interest expense.
- Share repurchases and quarterly dividends were suspended in connection with COVID-19. The company paid a $0.60-per-share dividend in Q1 2020 and none in Q2.
- The company reduced planned fiscal 2020 capital expenditures from approximately $75 million to $45 million. It stated that available and anticipated liquidity should fund projected requirements for at least the next 12 months, while noting that further cost reductions could be made if conditions deteriorate.
Outlook, risks, and other disclosures
The filing provides no specific revenue or earnings guidance. Management said remaining North American stores were planned to reopen in Q3, subject to public-health conditions and government restrictions. The company cautioned that COVID-19 could continue to materially affect demand, operations, supply chains, estimates, asset values, and financial results; further impairments could arise if assumptions about the pandemic’s magnitude or duration prove incorrect. Management expected an approximately 21% tax rate for the remainder of 2020.
The filing notes that previously issued cash-flow statements had presentation errors relating to non-cash lease activity. Management concluded the errors were not material and did not affect net operating cash flow; the current-period presentation reflects the corrected classification. The company reported no legal proceedings it believed would materially affect its financial position, results, or cash flows.
Key facts for investors to verify
- Whether eCommerce growth and store reopenings offset continuing COVID-19-related weakness in stores, wholesale, and international markets.
- Whether inventory reserves and purchase commitments stabilize, and whether additional goodwill, tradename, or store-asset impairments are needed.
- Cash generation excluding rent deferrals and other timing effects, and the company’s ability to maintain the $700 million minimum-liquidity requirement.
- Debt service costs, revolving-facility availability, covenant requirements after 2020, and restrictions on dividends and repurchases.
- Progress against the reduced capital-spending plan and management’s stated liquidity outlook for at least the next 12 months.