Carter’s, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter ended April 4, 2015, compared with the quarter ended March 29, 2014. Both quarters contained 13 weeks. The filing is for 2015 Q1, notwithstanding the request metadata identifying 2014 Q1.
Business context
Carter’s designs, sources, and markets children’s apparel under Carter’s, OshKosh and other brands through wholesale, retail, eCommerce, and licensing channels. At quarter-end, it operated 549 Carter’s U.S. stores, 208 OshKosh U.S. stores, and 127 Canadian stores.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $684.8 million | $651.6 million |
| Gross profit / gross margin | $284.1 million / 41.5% | $261.7 million / 40.2% |
| Operating income / margin | $84.5 million / 12.3% | $61.5 million / 9.4% |
| Net income | $49.8 million | $34.3 million |
| Diluted EPS | $0.94 | $0.63 |
| Operating cash flow | $87.2 million | $30.6 million |
| Capital expenditures | $20.8 million | $32.1 million |
- Net sales rose 5.1%; net income increased 45.2%. Gross margin improved 1.3 percentage points, while SG&A declined to 30.8% of sales from 32.2%.
- Sales gains were led by Carter’s Retail (+11.9%) and OshKosh Retail (+14.9%). Carter’s Wholesale declined 0.9%, and International sales declined 2.7%. Foreign exchange reduced consolidated sales by approximately $5.6 million.
- Operating cash flow increased substantially, primarily on higher earnings and favorable working-capital timing, including inventory purchases and other payments. Cash flow less capital expenditures was approximately $66.5 million, versus negative $1.5 million a year earlier.
- At April 4, 2015, cash was $377.4 million, total debt was $586.3 million, and net debt was approximately $208.9 million. The company had $180.8 million of additional revolving-credit availability, excluding $7.9 million of letters of credit. Current assets were $998.6 million and current liabilities $187.5 million.
- Debt comprised $400 million of 5.25% senior notes due August 2021 and $186.3 million outstanding under the revolving facility. The company reported compliance with facility covenants.
- Cash dividends were $0.22 per share, compared with $0.19; the company repurchased 157,900 shares for $14.1 million. Remaining repurchase authorization was approximately $171 million.
Changes, outlook, and risks
- Operating income growth reflected improved gross profit, lower corporate expenses, and better OshKosh Retail results, whose operating loss narrowed to $1.0 million from $4.5 million. Carter’s Retail operating margin decreased to 17.3% from 18.7%, despite higher sales.
- The effective tax rate was 34.5%, versus 36.7%, helped by approximately $1.8 million of prior-year federal and state audit benefits. Management expected a full-year fiscal 2015 tax rate of approximately 36.0%.
- Management planned approximately $130 million of fiscal 2015 capital expenditures; approximately 65 new Carter’s U.S. stores, 45 OshKosh U.S. stores, and 20 Canadian stores; and store closures of four, five, and none, respectively. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Management said cash on hand, operating cash flow, and available revolver capacity were expected to fund foreseeable requirements. It cautioned that first-half results may not indicate full-year performance because of seasonality.
- Currency is a notable exposure: exchange rates reduced quarterly sales, and management noted that a 1 percentage-point change in rates on variable-rate borrowings would change annual pretax interest cost by about $1.9 million. A Canadian-dollar portion of the revolving debt also creates currency exposure.
- Unusual and judgment-sensitive items include the tax-audit benefit, foreign-currency translation loss of $6.0 million, and $7.7 million current contingent consideration from the Bonnie Togs acquisition. No material adverse impact from pending or threatened legal matters was identified. The company reported effective disclosure controls and no material changes in internal control.
Investor verification priorities
- Confirm the filing period and compare fiscal-quarter results with appropriately aligned periods, including the stated seasonality and foreign-exchange effects.
- Assess the sustainability of the margin and earnings improvement, particularly wholesale performance, Carter’s Retail margin pressure, and OshKosh Retail’s remaining loss.
- Separate recurring operating cash generation from favorable working-capital timing and evaluate planned capital spending against cash and borrowing needs.
- Review debt covenants, revolver availability, variable-rate and currency exposure, and restrictions on dividends or repurchases.
- Track the assumptions behind the tax-rate outlook, remaining uncertain tax benefits, and the contingent-consideration liability.