Carter’s, Inc. — Form 10-Q Summary
Period: The filing covers the fiscal quarter ended June 29, 2019, and the first two fiscal quarters of 2019. This differs from the request metadata, which says 2018 Q2; the filing’s comparable period is 2018.
Business context
Carter’s designs, sources, and markets children’s apparel and related products under Carter’s, OshKosh, Skip Hop, and other brands. It sells through U.S. retail and eCommerce, U.S. wholesale, and international channels, and operated 1,064 stores in the U.S., Canada, and Mexico at quarter-end.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $734.4 million | $696.2 million | $1,475.4 million | $1,452.0 million |
| Gross profit / margin | $323.0 million / 44.0% | $310.0 million / 44.5% | $638.9 million / 43.3% | $642.4 million / 44.2% |
| Operating income / margin | $64.5 million / 8.8% | $57.0 million / 8.2% | $125.2 million / 8.5% | $117.3 million / 8.1% |
| Net income | $43.9 million | $37.3 million | $78.4 million | $79.7 million |
| Diluted EPS | $0.97 | $0.79 | $1.72 | $1.68 |
- Q2 sales grew 5.5%; first-half sales rose 1.6%. U.S. Retail and U.S. Wholesale gains were partly offset by lower International sales.
- First-half operating cash flow was $104.5 million, versus $103.1 million a year earlier. Capital expenditures were $25.0 million; management planned about $80 million for full-year 2019.
- Cash and cash equivalents were $118.5 million at June 29, 2019, down from $170.1 million at December 29, 2018. First-half financing cash outflow was $132.5 million, including debt refinancing, share repurchases, and dividends.
- Long-term debt was $604.4 million. The revolving facility had $110.0 million borrowed, $5.0 million of letters of credit, and approximately $635.0 million available; the company reported covenant compliance.
- Adoption of lease accounting standard ASC 842 added $705.6 million of operating lease assets and $843.4 million of operating lease liabilities at quarter-end. Management said adoption materially affected the balance sheet but not materially the income statement or cash flows.
Material changes and management commentary
- Q2 U.S. Retail sales rose 5.3%, U.S. Wholesale sales rose 9.4%, and International sales fell 3.0%. First-half comparable U.S. Retail sales were nearly flat, up 0.1%; Canada comparable retail sales fell 2.6%.
- Q2 gross margin declined 0.5 percentage points and first-half gross margin declined 0.9 points. Management cited customer and channel mix, higher eCommerce shipping costs, and higher product costs; lower inventory provisions partly offset these pressures.
- SG&A as a share of sales improved in both periods. First-half SG&A included lower receivables provisions, primarily reflecting the absence of prior-year customer bankruptcy charges, partly offset by retail, distribution, restructuring, and technology costs.
- In March 2019, the company redeemed $400 million of 5.25% notes due 2021 and issued $500 million of 5.625% notes due 2027. The transaction extended maturities and generated a $7.8 million first-quarter debt-extinguishment loss. First-half interest expense increased to $18.7 million from $15.9 million.
- The company repurchased $92.4 million of shares in the first half and paid dividends of $1.00 per share, versus $89.1 million and $0.90 per share, respectively, in the prior-year period.
Outlook, risks, and contingencies
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management stated that cash, operating cash flow, the revolving facility, and capital-market access are expected to meet foreseeable funding needs; it did not expect current economic conditions to prevent meeting cash requirements.
- Results are seasonal, with sales and gross profit generally lower in the first half than the second half; interim results may not indicate full-year performance.
- Risks include foreign-currency exposure, variable interest rates, sourcing and product-cost pressures, retail traffic and channel mix, and customer credit risk. A 1% change in the rate on $110 million of variable-rate borrowings would change annual pretax interest expense by about $1.1 million.
- Management reported no material change to the risk factors in the prior Form 10-K, no legal proceeding believed likely to have a material adverse effect, effective disclosure controls, and no material change in internal control over financial reporting.
- The filing reports $14.6 million of gross unrecognized tax benefits. About $2.5 million of related reserves were expected to reach statute-of-limitations expiry within the next fiscal year.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2019, not Q2 2018.
- Track whether gross-margin pressure from product costs, shipping, and mix persists, and whether U.S. Retail comparable sales improve.
- Review inventory levels, wholesale demand, and operating cash conversion, including the effect of seasonal working-capital needs.
- Assess the cost and implications of the refinancing, the higher coupon on the 2027 notes, and the company’s total debt and lease obligations.
- Monitor the China transition to a licensing model, foreign-exchange impacts, and the planned $80 million of full-year capital expenditures.